What kind of Fed activity is likely to be evident when a reserve drain is required, but the Fed does not want to signal a policy move toward restraint?
A)No Fed buying or selling is likely to occur.
B)The Fed is likely to engage in reverse repurchase agreements.
C)The Fed is likely to engage in system repurchase agreements.
D)The Fed is likely to engage in outright sales.

Question

Quizplus · Accepted Answer

When a reserve drain is required but the Fed does not want to signal a policy move toward restraint, it is likely to engage in reverse repurchase agreements. This involves temporarily selling securities to banks and other financial institutions, with the agreement to buy them back at a later date. This allows the Fed to drain reserves from the banking system without explicitly announcing a change in policy. Other options (A, C, and D) would involve some form of Fed buying or selling, which would signal a policy move.

What Kind of Fed Activity Is Likely to Be Evident