Open Market Operations - Increasing the Money Supply - Key Concept

The Central Bank has holdings of cash and holdings of bonds and it has relationships with large security dealers, which also hold cash and bonds. If the Central Bank wants to increase the amount of money in circulation, and increase money supply, it buys bonds, from the security dealers. The Central Bank buys the bonds from these primary dealers, and the money is deposited in their banks thus adding money to the system. The buying and selling of bonds by the Central Bank are called open-market operations.