Open market operations involve the central bank buying or selling government securities to influence which variable?

• A. Tax rates
• B. Exchange rates
• C. Price levels
• D. Money supply

Answer: (D)

Open market operations are a monetary policy tool used to manage liquidity in the banking system by buying or selling government securities. When the central bank buys securities, it pays by adding reserves to banks, increasing their ability to lend and thus expanding the money supply, which tends to push down short‑term interest rates. When it sells securities, it withdraws reserves, reducing lending capacity, shrinking the money supply, and pushing up rates. The direct effect of these operations is on the money supply (and the associated interest rates). Taxes are set by fiscal policy, not by open market operations, and while the money supply can influence prices or the exchange rate over time, those are not the immediate target of this tool.