Which of the following best describes a monetary policy tool used by a central bank to conduct expansionary or contractionary monetary policy?

• A. Setting a legal minimum wage to influence household income and consumption
• B. Open market operations: buying or selling government securities to change bank reserves and the money supply
• C. Imposing tariffs on imports to protect domestic industries and alter net exports
• D. Changing government spending levels to directly increase or decrease aggregate demand

Answer: (B)

Verified step by step guidance

1. Step 1: Understand that monetary policy tools are methods used by a central bank to influence the money supply and interest rates in the economy, aiming to achieve macroeconomic goals like controlling inflation, managing employment, and stabilizing the currency.
2. Step 2: Identify that open market operations involve the central bank buying or selling government securities (such as bonds) in the open market to adjust the amount of reserves banks hold, which in turn affects the money supply.
3. Step 3: Recognize that when the central bank buys government securities, it injects money into the banking system, increasing bank reserves and encouraging lending, which is expansionary monetary policy.
4. Step 4: Conversely, when the central bank sells government securities, it withdraws money from the banking system, reducing bank reserves and discouraging lending, which is contractionary monetary policy.
5. Step 5: Differentiate open market operations from other options like setting minimum wages (a labor market policy), imposing tariffs (a trade policy), or changing government spending (a fiscal policy), as these are not tools of monetary policy.