Question

When the Fed undertakes reverse repo transactions with financial institutions, it is trying to Multiple Choice increase the money supply. reduce the federal budget deficit. increase the federal budget deficit. reduce the money supply.

Answer 1

Answer: Reduce the money supply.

Explanation:

When the Fed judges money supply to be higher than it should be, one of the ways it can reduce money supply is to embark on a Reverse Repurchase agreement.

This agreement means that the Fed is selling securities to financial institutions and will buy them back at a higher rate in the future. The money that the financial institutions pay the Fed will leave the market and go to the Fed thereby reducing the money supply in the Economy.