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.

Question

Business

Cullen Mata

1 May, 18:32

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.

+1

Answers (1)

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Layne Huber · Answer 1

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.

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 ofA) $1 million.B) $0.C) $25 million.D) $5 million.

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.