Question

Which one of the Fed's instruments of monetary control is most important?

A. Reserve ratios
B. Term auction facilities
C. Discount rates
D. Open-market operations

Answer 1

The most important instrument of monetary control for the Federal Reserve is Open Market Operations. Open market operations involve buying and selling government bonds with banks to influence the quantity of bank reserves and interest rates.

Step-by-step explanation:

The most important instrument of monetary control for the Federal Reserve is Open Market Operations. Open market operations involve buying and selling government bonds with banks to influence the quantity of bank reserves and interest rates.

When the central bank buys government bonds, it increases the reserves of the banks and stimulates lending, which promotes economic activity.

Conversely, when the central bank sells government bonds, it reduces bank reserves, leading to a decrease in lending and economic activity. Open market operations allow the Federal Reserve to directly control the money supply and influence economic conditions.