When the Fed undertakes a "repo" transaction with a ﬁnancial institution, the Fed in essence
A) grants a collateralized loan to the ﬁnancial institution.
B) provides an insurance coverage to the ﬁnancial institution.
C) buys shares of stock of the ﬁnancial institution.
D) reduces the reserves of the ﬁnancial institution.

Question

Quizplus · Accepted Answer

When the Fed undertakes a "repo" transaction with a financial institution, it is essentially granting a collateralized loan to the institution. The financial institution pledges securities as collateral and receives cash from the Fed, with the agreement to repurchase the securities at a later date. This transaction helps the financial institution to manage its short-term liquidity needs.

When the Fed Undertakes a "Repo" Transaction with a ﬁNancial