Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Selling government bonds decreases the money supply.
B
Buying government bonds increases interest rates.
C
Selling government bonds can lead to higher interest rates.
D
Buying government bonds increases the reserves in the banking system.
E
Open market operations can influence inflation rates.
Understanding the Answer
Let's break down why this is correct
Answer
Open market operations are actions taken by a Central Bank to control the money supply in an economy by buying or selling government securities. When the Central Bank buys securities, it injects money into the economy, which can lower interest rates and encourage borrowing and spending by businesses and consumers. For example, if a Central Bank buys bonds from banks, those banks have more money to lend, leading to increased investment and economic growth. Conversely, when the Central Bank sells securities, it removes money from the economy, which can raise interest rates and slow down spending. Therefore, the effects of these operations can significantly influence economic activity and inflation.
Detailed Explanation
All the statements about open market operations are incorrect. Other options are incorrect because Some might think selling bonds reduces money; It's a common mistake to think buying bonds raises interest rates.
Key Concepts
Open Market Operations
Monetary Policy
Interest Rates
Topic
Open Market Operations
Difficulty
medium level question
Cognitive Level
understand
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