A sound monetary policy response to a sudden temporary increase in currency held by the public would be to
A) reduce the rate of currency printing.
B) carry out defensive open market operations.
C) carry out dynamic open market operations.
D) raise reserve requirements.

Question

Quizplus · Accepted Answer

Defensive open market operations are used to offset movements in the amount of reserves in the banking system and maintain the short-term interest rates at the target level set by the central bank. When there's a sudden temporary increase in currency held by the public, it reduces the reserves in the banking system. To counteract this and maintain monetary policy targets, the central bank can buy securities in the open market to add reserves to the banking system, which is a defensive action.

A Sound Monetary Policy Response to a Sudden Temporary Increase