Open market operations refer to what?

• A. A purchase or sale of US Treasury bills by the Fed to change the monetary base.
• B. A change in reserve requirements.
• C. A change in the discount rate.
• D. A fiscal policy tool.

Answer: (A)

Open market operations are actions where the central bank buys or sells government securities to influence the monetary base and the level of bank reserves. When the Fed purchases U.S. Treasury bills, it injects reserves into the banking system, expanding the monetary base and typically pushing interest rates down, which supports more lending and spending. When it sells these securities, it pulls reserves out, shrinking the monetary base and usually pushing rates up, which can slow borrowing and activity.

The other options describe different tools: changing reserve requirements directly alters how much banks must hold as reserves but doesn’t involve trading securities. changing the discount rate adjusts borrowing costs for banks from the central bank but is not the same as conducting open market trades. fiscal policy involves government spending and taxation and is outside the realm of monetary policy actions.