If the Bank of Canada wants to temporarily inject reserves in the banking system, it will engage in ________.
A) a repurchase agreement
B) a "swap" transaction
C) a reverse repurchase agreement
D) None of the above.

Question

Quizplus · Accepted Answer

A repurchase agreement is when the Bank of Canada buys securities from a bank with an agreement to sell them back in the future. This increases the bank's reserves and therefore injects liquidity into the banking system temporarily. A "swap" transaction involves the exchange of currencies, which may not necessarily inject reserves into the banking system. A reverse repurchase agreement is when the Bank of Canada sells securities with an agreement to buy them back, which decreases reserves and therefore does not inject liquidity into the banking system.

If the Bank of Canada Wants to Temporarily Inject Reserves