When the central bank has lowered or raised interest rates, this occurs only because the central bank's bond traders are:
A) Conducting open-market operations to ensure revenue is generated.
B) Conducting open-market operations to cover their positions.
C) Conducting open-market operations to ensure that the money supply is increased.
D) Conducting open-market operations to ensure that the equilibrium interest rate equals x percent.

Question

Quizplus · Accepted Answer

The central bank conducts open-market operations to ensure that the equilibrium interest rate equals the desired level. Lowering interest rates will increase the money supply and stimulate economic growth, while raising interest rates will reduce inflationary pressures. Bond traders are responsible for implementing these monetary policies through the purchase or sale of government bonds in the open market. Their goal is to achieve the central bank's target interest rate. A and B are incorrect because bond traders do not conduct open-market operations for their own revenue or to cover their positions. C is not entirely accurate because increasing the money supply is only one potential goal of open-market operations, not the sole reason for adjusting interest rates.

When the Central Bank Has Lowered or Raised Interest Rates