1. is the standard method by which the central bank manages the money supply.
2. is an example of open market operations.
3. increases the money supply when the treasury spends the money.
4. is all of the above.
Choose the correct option.
The right choice is option 3. The treasury puts high-powered money into the economy when it spends the funds borrowed from the central bank. This is not an open market operation, because the central bank does not purchase bonds in the open market. The government is, in effect, buying bonds from itself and spending the money. Open market operations are the standard method by which most central banks manage the money supply.
The usual process of high-powered money creation begins with the treasury branch of government issuing bonds to the public to finance a part of the government's expenditure. This by itself does not increase the stock of base money because the government spends every dollar borrowed. The stock of high-powered money is increased when the central bank buys some of this public debt in the open market. The purchase of government bonds by the central bank directly from the treasury is not an open market transaction---the central bank is simply printing money and giving it to another branch of government in return for pieces of paper under terms and conditions entirely internal to the government.