Final answer:
Open market operations involve the Federal Reserve buying or selling U.S. Treasury bonds to control the money supply and influence interest rates, specifically targeting the federal funds rate.
Step-by-step explanation:
Open market operations are a central tool of monetary policy used by the Federal Reserve. When the central bank engages in open market operations, it buys or sells U.S. Treasury bonds to influence the quantity of bank reserves and the level of interest rates. The primary aim of these operations is to steer the federal funds rate, which, despite its name, is the interest rate applicable to overnight loans between commercial banks.
Through such operations, the central bank can add or remove liquidity from the banking system, thereby influencing overall economic activity by making credit more or less available. When the Fed buys government securities, money is injected into the economy, and when it sells, money is taken out. This process affects currency supply, bank reserves, and can lead to changes in expenditure and revenue patterns within the economy.