When the Fed engages in an overnight repo
A)a bank agrees to hold a certain amount of clearing balances at the Fed.
B)a secondary government securities dealer agrees to buy a security from the Fed one day and sell it back the next day.
C)a primary government securities dealer agrees to sell a security to the Fed one day and buy it back the next day.
D)The Fed repossesses property that a bank owns as punishment for the bank's failure to pay off a discount loan.

Question

Quizplus · Accepted Answer

In an overnight repo, the Federal Reserve agrees to buy a security from a primary government securities dealer one day and then sell it back to them the next day, which is the opposite of what happens in a reverse repo. This temporary transaction in government securities enables the Fed to adjust the level of reserves in the banking system. Choice (A) refers to holding clearing balances, which is a different type of transaction. Choice (B) is describing a reverse repo, which is the opposite of an overnight repo. Choice (D) is describing a penalty for a bank's failure to pay off a discount loan, which is not related to an overnight repo.

When the Fed Engages in an Overnight Repo