An open market purchase
A) is a purchase by the government of goods and services.
B) is a purchase of money by the central bank.
C) is a purchase of government bonds by the central bank.
D) is a sale of government bonds by the central bank.
E) causes decrease in the money supply.

Question

Quizplus · Accepted Answer

An open market purchase is a purchase of government bonds by the central bank. This transaction increases the money supply in the economy as it involves the central bank paying for the bonds with newly created money. Choice A is incorrect as a purchase of goods and services by the government is not related to monetary policy. Choice B is incorrect as the purchase of money is not a commonly used term in economics. Choice D is incorrect as it refers to a sale of government bonds, which is the reverse of an open market purchase. Choice E is incorrect as an open market purchase actually causes an increase in the money supply.

An Open Market Purchase