The Federal Reserve most frequently relies on which of the following to change the money supply?

A) changes in the required reserve ratios.

B) changes in the discount rate.

C) open-market operations.

D) changes in the inflation rate.

Ans. C) open-market operations.

Open market operations are the most widely used monetary policy instrument due to their flexibility. When the economy undergoes a recession, the Federal Reserve purchases government securities to add reserves to commercial banks that inflates their credit creation ability and allows them to lower their interest rates. Consequently, borrowing gets incentivized and an increase in money supply increases aggregate demand to rescue the economy out of the recession. When the economy undergoes inflation, the Federal Reserve targets a reduction in the price level by reducing the aggregate demand. This contraction is realized via the sale of government securities to absorb money supply.