Ace the AFP Exam 2025 – Boost Your Financial Wizardry!

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What is an open market operation?

The buying and selling of government securities by a central bank

An open market operation involves the buying and selling of government securities by a central bank as a means to influence monetary policy and overall economic conditions. When a central bank purchases government securities, it injects liquidity into the banking system, which can lower interest rates and stimulate economic growth. Conversely, when it sells government securities, it pulls money out of circulation, which can lead to higher interest rates and can help cool off an overheating economy.

This mechanism is crucial for central banks as it allows them to control the money supply and, by extension, influence inflation and employment levels. The direct engagement in government securities ensures that open market operations are a primary tool for implementing monetary policy, making this option the most accurate description of the term.

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A method to set interest rates by central banks

The regulation of foreign exchange markets

A practice to manage stock market performance

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