Final answer:
An open market operation is the purchase or sale of securities by the Federal Reserve System in the loanable funds market, used to influence the federal funds rate and the supply of money in the economy.
Step-by-step explanation:
An open market operation is the purchase or sale of securities by the Federal Reserve System in the loanable funds market. These operations are used to manage the supply of money in the economy by influencing the level of bank reserves and therefore the federal funds rate, which is the interest rate charged by commercial banks for overnight loans to other banks. The primary goal is to achieve a target federal funds rate to guide monetary policy.
For example, when the Federal Reserve purchases Treasury bonds, banks receive payments which increase their reserves. Banks with more reserves tend to lend more, which can lead to lower interest rates and increased money supply. Conversely, selling bonds reduces the money supply and can lead to higher interest rates as banks lower the number of loans they issue to maintain reserve requirements.
Therefore, the correct answer is A: the purchase or sale of securities by the Federal Reserve System in the loanable funds market.