Answer: purchases bonds.

## Explanation When a central bank purchases bonds (through open market operations), it injects money into the banking system. Here's how this works: 1. **Open Market Operations**: When the central bank buys bonds from commercial banks or the public, it pays for these bonds by creating new bank reserves. 2. **Money Creation Process**: The newly created reserves allow commercial banks to increase their lending capacity, which leads to deposit creation and expansion of the money supply through the money multiplier effect. 3. **Contrast with Other Options**: - **Option B (increases the policy rate)**: This is contractionary monetary policy. Higher policy rates make borrowing more expensive, reducing lending and decreasing money supply. - **Option C (raises the reserve requirement)**: This reduces the money multiplier effect by requiring banks to hold more reserves against deposits, thereby decreasing the money supply. 4. **Key Mechanism**: Bond purchases increase bank reserves → banks have more excess reserves → banks can make more loans → new deposits are created → money supply expands. Therefore, central bank bond purchases are an expansionary monetary policy tool that increases the money supply.

Author: LeetQuiz .