Answer:
A. The Federal Reserve sells bonds via the commercial banking system.
Explanation:
Open market operations are liquidity injecting or liquidity absorption from the economy by the central bank through the selling or buying of government securities.
Open market operations involve the central bank influencing the money supply and the interest rate through selling or buying bonds. The Federal Reserve Bank selling bonds to the public through commercial banks is an example of this.
When central bank wants to increase the money supply in economy, it buys the boonds (with the help of commercial banks) from the public. Central bank receives the bonds and gives money to the public. In this way money supply increases in economy.
Banks often have an incentive to loan out all funds up to the reserve requirement, which is the amount a bank must hold as vault cash or on deposit with the Federal Reserve Bank, but this is not an open market operation.
If central bank wants to decrease the money supply it sells the bonds to the public. Central bank lowering the interest rate is not included in open market operations but it is a instrument of monetary policy. Open market operations are different from monetary policy.
Increasing or decreasing the discount rate, which is the rate at which the Federal Reserve loans money to commercial banks, affects the money supply, but this is not considered an open market operation.
