When the Fed buys a security from a financial firm and the financial firm agrees to buy back the security the next day,the transaction is known as
A)a repurchase agreement.
B)a reverse repurchase agreement.
C)an open market flip-flop.
D)a federal funds swap.

Question

Quizplus · Accepted Answer

This type of transaction, where the Fed buys a security from a financial firm and agrees to sell it back the next day, is known as a repurchase agreement, or repo for short. This allows the financial firm to obtain short-term funding from the Fed, using the security as collateral. As such, it can be seen as a type of short-term loan. The opposite type of transaction, where the financial firm buys a security from the Fed with an agreement to sell it back the next day, is known as a reverse repurchase agreement, or reverse repo.

When the Fed Buys a Security from a Financial Firm