Open-market operations used to contract the economy involve which action?

Open-market operations used to contract the economy involve which action?

• A. Buying securities
• B. Issuing currency
• C. Cutting taxes
• D. Selling securities

Answer: (D)

Contractionary open-market actions involve the central bank selling government securities. When these securities are sold, buyers pay with their funds, which reduces bank reserves and the overall money supply. With less money circulating, short-term interest rates tend to rise, making borrowing more expensive and dampening spending and investment. This cools the economy and helps control inflation. Buying securities would inject liquidity and lower rates, issuing currency would increase the money supply, and cutting taxes is a fiscal—not monetary—policy tool.

Contractionary open-market actions involve the central bank selling government securities. When these securities are sold, buyers pay with their funds, which reduces bank reserves and the overall money supply. With less money circulating, short-term interest rates tend to rise, making borrowing more expensive and dampening spending and investment. This cools the economy and helps control inflation. Buying securities would inject liquidity and lower rates, issuing currency would increase the money supply, and cutting taxes is a fiscal—not monetary—policy tool.