In a particular state, many commercial banks struggle to lend money to the borrowers due to lack of money supply. The Fed buys securities from these banks and this creates a smooth flow of money for the banks to conduct their transactions. In this case, which of the following tools has the Fed most likely used to control the money supply?
A)Open market operations
B)Discount rate changes
C)Reserve requirement changes
D)Interest rate charges

Question

Quizplus · Accepted Answer

The Fed's purchase of securities from the commercial banks is an example of open market operations, which is a tool used by the Fed to control the money supply. Through these operations, the Fed buys or sells government securities to banks, which affects the amount of reserves that banks hold, and in turn, affects their ability to make loans and create money. By buying securities from banks, the Fed injects new money into the system, which can help to ease liquidity constraints and increase the availability of credit.

In a Particular State, Many Commercial Banks Struggle to Lend