Open-market operations involve which action?

Open-market operations involve which action?

• A. Imposing taxes
• B. Setting minimum wage
• C. Regulating currency exchange
• D. Buying and selling of government securities

Answer: (D)

Open-market operations are a monetary policy tool used by a central bank to manage the money supply and short-term interest rates. The action involved is buying and selling government securities in the open market. When the central bank buys government securities, it pays for them by adding reserves to banks, increasing the money supply and typically lowering short-term interest rates. When it sells securities, it removes reserves from banks, decreasing the money supply and typically raising short-term interest rates. This mechanism helps the central bank steer the target rate and influence overall economic activity. The other options describe fiscal policy (taxes) or labor/wage policy (minimum wage) or exchange-rate interventions (regulating currency exchange), which are not open-market operations.

Open-market operations are a monetary policy tool used by a central bank to manage the money supply and short-term interest rates. The action involved is buying and selling government securities in the open market. When the central bank buys government securities, it pays for them by adding reserves to banks, increasing the money supply and typically lowering short-term interest rates. When it sells securities, it removes reserves from banks, decreasing the money supply and typically raising short-term interest rates. This mechanism helps the central bank steer the target rate and influence overall economic activity. The other options describe fiscal policy (taxes) or labor/wage policy (minimum wage) or exchange-rate interventions (regulating currency exchange), which are not open-market operations.