How do overnight reverse repurchase agreements work?
A)The Open Market Trading Desk makes loans to banks and charges them an interest rate higher or lower than the discount rate.
B)They set the exact federal funds rate that can be charged by financial institutions.
C)They increase the amount of reserves held by financial institutions and thus allow banks to make more loans.
D)The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Question

Quizplus · Accepted Answer

Overnight reverse repurchase agreements involve the Open Market Trading Desk selling bonds to financial institutions with an agreement to repurchase them the next day at a higher price, effectively setting a floor for the federal funds rate. This allows the Federal Reserve to soak up excess cash and reduce the amount of reserves held by banks.

How Do Overnight Reverse Repurchase Agreements Work