Why are repurchase agreements used to conduct mostshort-term monetary policy operations, rather than thesimple, outright purchase and sale of securities?
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
Why are repurchase agreements used to conduct most
short-term
simple, outright purchase and sale of securities?
The central bank's strategy on the application of financial tools within its supervision to meet the Legislation's objectives is referred to as monetary policy.
The repurchase agreement is a method of brief financing for public securities sellers. . It occurs when a broker offers government securities to buyers overnight and then purchases it back the next day at a marginally huge return.
The Fed can quickly change open market activities in reaction to regular circumstances due to repurchase agreements. Repurchase deals are short-term in nature and can be quickly reversed if the float shifts. They are most often utilized for protective purposes.
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