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FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust

A central bank wants to drain liquidity temporarily from the banking system without permanently shrinking its asset holdings. Which conventional open market operation is most suitable?

Reverse repurchase agreements are most suitable. The central bank temporarily sells securities and absorbs cash from banks, draining reserves for a set period, after which the transaction unwinds, so its asset holdings are not permanently changed.

  1. AReverse repurchase agreements with banksCorrect
  2. BRepurchase agreements in which it lends cash to banks
  3. COutright permanent purchases of government bonds
  4. DLowering the reserve requirement ratio

Explanation

In a reverse repo the central bank sells securities temporarily and takes in cash, draining reserves until maturity. Repos inject liquidity, outright purchases add permanently, and lowering reserve requirements releases liquidity.

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