Question

Which statement is an example of an open market operation?

a. A bank loaning out all but the requisite 10% of its funds to hold in storage.

b. The central bank lowers the interest rate from 5% to 3% on the loans it gives to commercial banks.

c. Naftali runs a bazaar in Baghdad, Iraq, selling trinkets to tourists.

d. The Federal Reserve sells bonds via the commercial banking system.

Answer 1

Option D.

• Open market operations refers to the buying and selling of government securities by the federal reserve in the open markets.
• When Fed wants to increase the money supply in the economy it makes an open market purchase of government securities from the open Markets and sells those securities in the open markets when it wants to decrease the money supply.
• Hence the statement that federal reserve sells bonds via the commercial banking system is an example of open market operation.