All of the following statements about open market operations are true EXCEPT:
A) They are used by the Federal Reserve to change the Federal Funds Rate
B) They are used by the Federal Reserve to change the discount rate
C) They are used by the Federal Reserve to buy and sell mutual funds
D) They are used by the Federal Reserve to transact with securities dealers
E) They are probably the most influential tool the Federal Reserve has to alter money supply
B) They are used by the Federal Reserve to change the discount rate
Explanation: B) The primary tool the Fed uses in its monetary policy is open market operations—buying and selling U.S. Treasury and federal agency bonds on the "open market." When the Fed buys securities, it adds reserves to the system, money is said to be "easy," and interest rates drop. Lower interest rates help stimulate the economy by decreasing the desire to save and increasing the demand for loans such as home mortgages. Open market operations would not change the discount rate, the interest rate charged by the Fed to banks in order to maintain their reserve funds.
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