Open market operations are powerful because of the dollar-for-dollar change in reserves that comes from buying or selling government securities in the open market.

Question

Quizplus · Accepted Answer

Open market operations involve the Federal Reserve buying or selling government securities in the open market. When the Fed buys securities, it pays for them with newly created reserves. When it sells securities, it takes reserves out of the banking system. The dollar-for-dollar nature of this exchange makes it a powerful tool for the Fed to influence the money supply and interest rates in the economy.

Open Market Operations Are Powerful Because of the Dollar-For-Dollar Change