Question

Open market operations alter the money supply by ___. A. influencing banks' ability to make loans to individuals and corporations B. adding currency to or withdrawing currency from banks' vaults C. adding currency to or withdrawing currency from the checking accounts of individuals and corporations D. influencing banks' ability to make loans to the government E. none of the above

Answer 1

In the open market operation the government bonds are traded and through trading bonds the money supply changes in the economy. Hence the banks ability to lend to the individuals and the corporation changes. This is because with the open market operation the money supply changes because with the change in the interest rate of the Government bonds, the individauls and corporations trade in the bond market. It means if the interest rate of the Bond are higher, then they purchase more bonds and if the interest rate is low, then they sell the bonds. Hence in this way the currency is added or withdrawn in the economy.

Hence Open market operations alter the money supply by adding currency to or withdrawing currency from the checking accounts of individuals and corporations.

Hence option C is the correct answer.

Option C;adding currency to or withdrawing currency from the checking accounts of individuals and corporations.