Which of the following statements is correct?
A)Open market purchases are expansionary and open market sales are contractionary.
B)Open market purchases are contractionary and open market sales are expansionary.
C)Both open market purchases and open market sales are expansionary.
D)Both open market purchases and open market sales are contractionary.

Question

Quizplus · Accepted Answer

Open market purchases involve the central bank buying government securities from commercial banks, which increases the reserves of these banks and makes it easier for them to lend. This, in turn, increases the money supply and is expansionary. Conversely, open market sales involve the central bank selling government securities to commercial banks, which decreases their reserves and makes it harder for them to lend. This decreases the money supply and is contractionary.

Which of the Following Statements Is Correct