Distinguish primary, secondary, third, and fourth markets and apply economic factors such as Federal Reserve policy, the business cycle, and economic indicators to securities markets.

Which action best describes how the Federal Reserve uses open market operations to ease monetary policy?

• AIt raises the discount rate charged to member banks that borrow directly from it
• BIt buys government securities in the open market, adding reserves to the banking systemcheck_circle Correct
• CIt increases the reserve requirement that banks must hold against deposits
• DIt sells government securities in the open market, withdrawing reserves from banks

Why A is wrong: Raising the discount rate is a genuine Fed tool, but it tightens rather than eases policy, and it is not an open market operation.

Why B is correct: Correct. Buying Treasury securities injects cash into banks, increases reserves, and puts downward pressure on short-term rates, which is how open market operations ease policy.

Why C is wrong: Changing reserve requirements is a real Fed lever, but increasing it drains lending capacity and tightens policy, and it is a separate tool from open market operations.

Why D is wrong: This is the correct mechanism run in reverse; selling securities removes reserves and tightens policy, so it does not ease conditions.