An open market operation occurs when:
A) banks loan funds to one another.
B) banks increase the reserve ratio.
C) the Fed buys or sells government bonds.
D) the Fed enforces regulations on the banking industry.

Question

Quizplus · Accepted Answer

An open market operation is a monetary policy tool used by the Fed to buy or sell government securities in the open market in order to influence the supply of money and credit in the economy. When the Fed buys securities, it injects money into the banking system, which increases the money supply and lowers interest rates, making it easier to borrow and spend. Conversely, when the Fed sells securities, it removes money from the banking system, which reduces the money supply and raises interest rates, making it more difficult to borrow and spend.

An Open Market Operation Occurs When