What is the most important monetary policy tool at the Fed's disposal?

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Quizplus · Accepted Answer

Open market operations refer to the Fed's buying and selling of government securities in the open market. This is the most important monetary policy tool at the Fed's disposal as it directly affects the money supply by increasing or decreasing the amount of reserves held by banks. By buying government securities, the Fed injects money into the banking system, thereby increasing the money supply. Conversely, by selling securities, the Fed drains money from the banking system, thereby decreasing the money supply. The discount rate, prime rate, and required reserve ratio also affect the money supply, but to a lesser extent and indirectly.

What Is the Most Important Monetary Policy Tool at the Fed's