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Government bonds bought and sold in open market operations are best understood as what?
AShares in state owned companies sold to the public
BInsurance contracts covering the revenue of the state
CLong-term loans of five years or more to the government
DShort-term deposits placed by the state with the banks
Answer & Solution
Correct answer: C. Long-term loans of five years or more to the government
1. A treasury issues bonds to raise the extra money needed to run the government when taxes and other revenues are not enough.
2. In effect those bonds are long-term loans, of five years or longer, made by businesses and individuals to the government.
3. The lender is the buyer of the bond and the borrower is the government.
4. A share would make the holder an owner rather than a lender, which is why that option is wrong.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.2 The Federal Reserve System_
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