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When the Federal Reserve (the Fed) conducts open market operations, what does it involve?
A.
It involves the Fed raising the discount rates.
B.
It involves the Fed buying and selling stocks.
C.
It involves the Fed buying or selling government bonds/securities.
D.
It involves the Fed opening new banking markets .
The correct answer is C. It involves the Fed buying or selling government bonds/securities.
To understand why, let's break down what open market operations are and how they work. Open market operations refer to the buying and selling of government bonds or securities by the Federal Reserve in the open market, which consists of banks, financial institutions, and investors.
Open market operations serve as a means for the Fed to influence the money supply and manage interest rates. When the Fed wants to expand the money supply and stimulate economic activity, it buys government bonds from banks and investors. This injects money into the banking system, increasing the amount of money available for lending and spending.
On the other hand, when the Fed wants to contract the money supply and manage inflation, it sells government bonds to banks and investors. This reduces the amount of money in circulation and makes it more expensive for banks to borrow, leading to higher interest rates.
By buying or selling government bonds, the Fed can effectively regulate the money supply, influence interest rates, and implement monetary policy to achieve its macroeconomic objectives.
Therefore, option C, which states that open market operations involve the Fed buying or selling government bonds/securities, is the correct answer.