When the Fed engages in an overnight reverse repo
A)a bank agrees to hold a certain amount of clearing balances at the Fed.
B)the fed sells securities and agrees to buy them back in one 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 reverse repo, the Fed sells securities to banks and financial institutions with an agreement to buy them back the next day at a slightly higher price. This is done to control the money supply in the economy. Choice A is incorrect because holding clearing balances at the Fed is not related to reverse repo. Choice C is incorrect because reverse repo agreements are not limited to primary dealers. Choice D is incorrect because a repo involves the Fed buying securities from banks, not repossessing property.

When the Fed Engages in an Overnight Reverse Repo