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31 December, 07:00

Assume that U. S. National Bank has no excess reserves and that the reserve ratio is 20 percent. If U. S. National borrows $5 million from a Federal Reserve Bank through a repo transaction, it can expand its loans by a maximum of

A) $1 million.

B) $0.

C) $25 million.

D) $5 million.

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Answers (1)
  1. 31 December, 07:23
    0
    D) $5 million

    Explanation:

    A repurchase (repo) transaction is a short term loan between entities that trade government securities. The agreement involves selling a government security on an overnight basis and then buying it back the next day. The price of the next day transaction is slightly higher than the original selling price, generating a profit for the original buyer.
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