Question

B) The most powerful monetary policy tool.

Answer 1

Central banks have three main monetary policy tools:

1. Open market operations,

2. The discount rate and

3. The reserve requirement.

Among them, Open Market Operations is the most used and powerful monetary policy tool.

Open market operations are when central banks buy or sell securities. These are bought from or sold to the country's private banks.

When the central bank buys securities, it adds cash to the bank's reserves. That gives them more money to lend. When the central bank sells the securities, it places them on the banks' balance sheets and reduces its cash holdings. The bank now has less to lend. A central bank buys securities when it wants expansionary monetary policy. It sells them when it executes contractionary monetary policy.it affects the money supply(liquidity) in the market and plays a key role in influencing inflation.