Question

Why are OMO the Fed's preferred means of controlling the money supply?

A) They are not influenced by market conditions
B) They have a direct and immediate impact on the money supply
C) They involve setting interest rates
D) They are more efficient than other methods

Answer 1

Open market operations (OMOs) are the Federal Reserve's preferred means of controlling the money supply because they have a direct and immediate impact on the money supply. When the Federal Reserve buys or sells U.S. Treasury bonds in the open market, it affects the quantity of bank reserves and the level of interest rates.

Step-by-step explanation:

Open market operations (OMOs) are the Federal Reserve's preferred means of controlling the money supply because they have a direct and immediate impact on the money supply. When the Federal Reserve buys or sells U.S. Treasury bonds in the open market, it affects the quantity of bank reserves and the level of interest rates. The specific interest rate targeted in open market operations is the federal funds rate, which reflects credit conditions in financial markets.