An open market purchase

Question

Quizplus · Accepted Answer

An open market purchase is a transaction in which the central bank (such as the Federal Reserve in the US) buys government bonds from the public or from banks. This increases the monetary base and adds reserves to the banking system, which can lead to increased lending and economic activity. Hence, the correct option is E, which mentions that an open market purchase is a purchase of government bonds by the central bank. The other options are incorrect: A is false because an open market purchase increases the money supply, not decreases it; B is a general definition of government spending and does not relate to open market purchase specifically; C is incorrect because it is not clear what "a purchase of money" means; and D is the opposite of what an open market purchase entails - it would be a sale of government bonds, not a purchase.

An Open Market Purchase