Which policy tool of the Federal Reserve Board (FRB) involves buying and selling government securities?

The correct answer is the policy tool known as open market operations. This term refers specifically to the buying and selling of government securities by the Federal Reserve. Through open market operations, the Fed can influence the money supply and interest rates in the economy. When the Federal Reserve buys government securities, it injects money into the banking system, which can lower interest rates and encourage lending and investment. Conversely, selling government securities can withdraw liquidity from the system, raising interest rates and slowing down economic activity.

Open market operations are a primary mechanism used by the Fed to implement monetary policy, making it a fundamental aspect of how they manage economic conditions and promote stability. This differentiates it from the other options, which involve different functions and tools that do not directly pertain to the buying and selling of government securities. For instance, changes in reserve requirements affect how much banks are required to hold in reserve and the discount rate pertains to the interest the Fed charges banks for short-term loans, both of which influence monetary policy but do not involve market transactions of securities. Federal budget decisions relate more to government spending and taxation, falling outside the scope of the Fed's monetary policy tools.