Question

The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute which of these plans?

1) A repurchase agreement to provide a short-term reduction in the money supply
2) A reverse repurchase agreement to provide a short-term reduction in the money supply
3) A repurchase agreement to provide a short-term boost to the money supply
4) A matched-sale purchase agreement to provide a short-term boost to the money supply

Answer 1

The Federal Reserve would likely execute a reverse repurchase agreement to provide a short-term reduction in the money supply in order to keep interest rates steady.

Step-by-step explanation:

The Federal Reserve would likely execute a reverse repurchase agreement to provide a short-term reduction in the money supply in order to keep interest rates steady. A reverse repurchase agreement involves the Federal Reserve selling government securities to banks and financial institutions with an agreement to repurchase them at a later date. By conducting a reverse repurchase agreement, the Federal Reserve reduces the amount of money in circulation, which can help prevent interest rates from increasing.