The Fed's use of open market operations primarily affects banks' ability to:

• A. determine the level of government spending
• B. set interest rates for consumer loans directly
• C. regulate the prices of goods and services
• D. lend money by changing their reserves

Answer: (D)

Verified step by step guidance

1. Understand that the Federal Reserve (the Fed) uses open market operations to buy or sell government securities in the open market.
2. Recognize that when the Fed buys securities, it increases the reserves of banks, and when it sells securities, it decreases bank reserves.
3. Recall that bank reserves are the funds banks hold to meet withdrawal demands and regulatory requirements, which directly influence their capacity to create loans.
4. Connect the change in reserves to the banks' ability to lend money: more reserves mean banks can lend more, fewer reserves mean they lend less.
5. Conclude that the primary effect of open market operations is on banks' lending capacity by altering their reserves, rather than directly setting interest rates, government spending, or prices of goods.