Question

The most widely used monetary policy tool is:

a) Open market operations
b) Altering reserve requirements
c) Altering the discount rate
d) Increasing the budget deficit

Answer 1

Open market operations are the most commonly used monetary policy tool by central banks, affecting bank reserves and the federal funds rate which influences other interest rates.

Step-by-step explanation:

The most widely used monetary policy tool by central banks is open market operations. This method involves the central bank buying and selling government bonds with banks to affect the quantity of bank reserves and the level of interest rates. The specific rate targeted is the federal funds rate, which is the rate banks charge each other for overnight loans. This rate is crucial as it reflects credit conditions in the financial markets and influences other interest rates throughout the economy.