Open market operations involve which activity?

Open market operations involve which activity?

• A. Buying and selling government bonds
• B. Setting the discount rate
• C. Determining reserve requirements
• D. Printing currency

Answer: (A)

Open market operations are the central bank’s tool for adjusting liquidity by buying or selling government securities in the open market. When the central bank buys government bonds, it pays with new reserves, increasing banks’ reserves and the money supply, which tends to push down short-term interest rates and encourage lending. When it sells bonds, it drains reserves, tightening the money supply and pushing rates up. This mechanism is different from setting the discount rate (the price at which banks borrow from the central bank), determining reserve requirements (the amount banks must hold as reserves), or printing currency (issuing physical money).

Open market operations are the central bank’s tool for adjusting liquidity by buying or selling government securities in the open market. When the central bank buys government bonds, it pays with new reserves, increasing banks’ reserves and the money supply, which tends to push down short-term interest rates and encourage lending. When it sells bonds, it drains reserves, tightening the money supply and pushing rates up. This mechanism is different from setting the discount rate (the price at which banks borrow from the central bank), determining reserve requirements (the amount banks must hold as reserves), or printing currency (issuing physical money).