Open-market operations occur when the Federal Reserve:

a. buys U.S. Treasury bills from the federal government.

b. buys or sells foreign currency.

c. buys or sells existing U.S. Treasury bills.

d. sells U.S. Treasury bills to the federal government.

• The correct answer is c. buys or sells existing U.S. Treasury bills.

The open-market operations (OMO) are one of the main monetary policy tools used by the Federal Reserve. This tool takes or gives liquidity to commercial banks and financial institutions by buying or selling U.S. Treasury securities. When the government wants to take liquidity, the Federal Reserve sells U.S. Treasury securities, and with this, the banks decrease the money available to lend. On the other hand, when the government wants to give liquidity, the Federal Reserve buys U.S. Treasury securities, and with this, the banks increase the money available to lend. Therefore, the correct answer is option c. In contrast, option a. and d. are incorrect because the purchase or sale of securities takes place between the Federal Reserve and commercial banks. Option b. is also incorrect because open-market operations do not include the purchase or sale of foreign currency.