SIE Exam Question 429: Answer and Explanation

Question: 429

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

• A. When the Fed buys and sells foreign bonds on the secondary market
• B. When the Fed buys and sells foreign bonds on the primary market
• C. When the Fed buys and sells U.S. treasury bonds on the primary market
• D. When the Fed buys and sells U.S. treasury bonds on the secondary market

Correct Answer: D

Explanation:

D: Open market operations is when the Fed buys and sells U.S. treasury bonds on the secondary market. Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). Historically, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC.