Final answer:
The statement that the Federal Reserve's frequent tool of monetary policy is the buying and selling of US government securities in the secondary market is true. Open market operations like these are instrumental in influencing the quantity of bank reserves and interest rates, particularly the federal funds rate.
Step-by-step explanation:
The statement that one of the Federal Reserve's most used tools of monetary policy is the buying and selling of US government securities in the secondary market is True. Open market operations are indeed the most commonly used tool by the Federal Reserve, the central bank of the United States, to achieve its monetary policy objectives. Such operations involve the purchase or sale of U.S. Treasury bonds to regulate the amount of bank reserves and influence interest rates, particularly the federal funds rate.
The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. Despite its name, this rate is actually set by the banking institutions themselves and not by the Federal Reserve, though the Fed influences this rate through open market operations. Moreover, since the end of 2008, the Fed has been engaging in these operations as part of a broader strategy to apply downward pressure to longer-term interest rates, aiming to stimulate economic activity and job creation.
By either buying or selling securities, the Fed can increase or decrease the amount of reserves banks have available to lend. When the Federal Reserve buys securities, it injects money into the banking system, increasing the supply of bank reserves, which typically lowers interest rates. Conversely, selling securities has the opposite effect, removing reserves from the banking system and typically causing interest rates to rise. These changes in interest rates influence broader economic conditions, affecting employment, output, and the prices of goods and services.