A reverse repurchase agreement of government securities by the Fed
A) permanently increases bank reserves.
B) temporarily increases bank reserves.
C) permanently reduces bank reserves.
D) temporarily reduces bank reserves.

Question

Quizplus · Accepted Answer

A reverse repurchase agreement is a temporary transaction in which the Fed sells government securities to banks and promises to buy them back at a later date. This decreases the reserves of the banks temporarily, as they use the funds to purchase the securities. When the Fed buys back the securities, the reserves of the banks increase again. Therefore, a reverse repurchase agreement temporarily reduces bank reserves.

A Reverse Repurchase Agreement of Government Securities by the Fed