The principal mechanism for directly changing the reserves of the banking system is:
A) The discount rate.
B) The reserve requirement.
C) Open-market operations.
D) The federal funds rate.

Question

Quizplus · Accepted Answer

Open-market operations involve the buying and selling of government securities by the Federal Reserve in order to influence the reserves of the banking system. When the Fed buys securities, it creates new reserves in the banking system. When it sells securities, it withdraws reserves from the banking system. Therefore, open-market operations are the principal mechanism for directly changing the reserves of the banking system. The discount rate and reserve requirement can also impact bank reserves, but they do so indirectly. The federal funds rate is the rate at which banks lend to each other and does not directly impact bank reserves.

The Principal Mechanism for Directly Changing the Reserves of the Banking