Question

The tool of monetary policy with which the Federal Reserve buys and sells government bonds is called:

		moral suasion.
		moral suasion.
		the discount rate.
		open-market operations.

Answer 1

Option D.

• The tool of monetary policy with which the federal reserve buys and sells government bonds is called open market operations.
• Open market operations are used for exapansionary or contractionary monetary policy actions by the Fed.
• When the Fed want's to enact an exapansionary monetary policy it purchases the bonds from the open market. This will increase the money supply and decrease the interest rates within the economy.
• Similarly when it wants to enact a contractionary monetary policy, it sells bonds in open markets. This will decrease the money supply and increase the interest rates within the economy.