What is the main difference between open market operations and reserve requirements?

The main difference between open market operations and reserve requirements is their distinct roles in the monetary policy framework, particularly in how they influence the money supply and bank reserves.

Open market operations refer to the buying and selling of government securities by a central bank, such as the Federal Reserve, to influence the levels of reserves in the banking system. When the central bank buys securities, it adds to the bank reserves, increasing the money supply. Conversely, when it sells securities, it reduces bank reserves and consequently decreases the money supply. This mechanism directly affects interest rates and liquidity in the economy, serving as a primary tool for managing monetary policy.

On the other hand, reserve requirements dictate the minimum amount of reserves that banks must hold against deposits. This requirement directly influences the lending capacity of banks. If the reserve requirement is high, banks have less money available to lend, which can tighten the money supply. If it's lowered, banks can lend more, increasing the money supply. Reserve requirements are a regulatory tool rather than a market operation.

Thus, option C accurately highlights that open market operations focus on influencing the money supply through the buying and selling of securities, while reserve requirements are about regulating the reserves that banks must maintain, thereby impacting their lending abilities. This distinction is fundamental