Question

If the Federal Reserve allows the trading desk to enter system-wide repurchase agreements, what happens to the following: yield, debt prices, interest rates, cash?

A) Yield increases, debt prices decrease, interest rates decrease, cash increases.
B) Yield decreases, debt prices increase, interest rates increase, cash decreases.
C) Yield increases, debt prices increase, interest rates increase, cash decreases.
D) Yield decreases, debt prices decrease, interest rates decrease, cash increases.

Answer 1

When the Federal Reserve allows the trading desk to enter system-wide repurchase agreements, it can lead to a decrease in yield, an increase in debt prices, a decrease in interest rates, and an increase in cash.

Step-by-step explanation:

When the Federal Reserve allows the trading desk to enter system-wide repurchase agreements, several things can happen:

• Yield: Yield refers to the return on an investment. If the trading desk enters into repurchase agreements, it increases the supply of cash in the system, which typically leads to a decrease in yield.
• Debt prices: If the trading desk enters into repurchase agreements, it increases the supply of cash in the system. This increase in cash can lead to an increase in demand for debt securities, which can push up debt prices.
• Interest rates: As the supply of cash increases due to the trading desk entering repurchase agreements, interest rates tend to decrease. This is because there is more cash available for borrowing, which reduces the cost of borrowing.
• Cash: When the trading desk enters into repurchase agreements, it injects cash into the system, increasing the amount of cash available.