SIE (Securities Industry Essentials) Practice Exam

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Of the following, which is the correct definition for open market operations?

When the Fed increases interest rates
When the government sells new bonds directly to the public
When the Fed buys and sells U.S. treasury bonds on the secondary market
When companies issue new stock shares

The correct answer is: When the Fed buys and sells U.S. treasury bonds on the secondary market

Open market operations refer to the buying and selling of U.S. treasury bonds by the Federal Reserve on the secondary market. This is done to control the money supply and interest rates in the economy. Option A is incorrect because interest rates can also be changed through other monetary policy tools, such as the discount rate or reserve requirements. Option B is incorrect because the government does not directly sell bonds to the public, but rather through auctions that are facilitated by the Federal Reserve. Option D is incorrect because stock shares are not directly involved in open market operations, although they can be affected indirectly by changes in interest rates.