If float decreases below its normal level, why might the...

Name: Problem 4, Chapter 15: The Economics of Money, Banking, and Financial Markets
Uploaded: 2021-07-13T20:34:52-08:00
Duration: 1 min 13 s
Channel: Kaylee Mcclellan
Description: If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base than an outright purchase of bonds?

If float decreases below its normal level, why might the manager of domestic operations consider it more desirable to use repurchase agreements to affect the monetary base than an outright purchase of bonds?

Key Concepts

Repurchase Agreements

Repurchase agreements, or repos, are short-term borrowing arrangements where a party sells securities and agrees to repurchase them later at a specified price. They are used by financial institutions to manage short-term liquidity and adjust the monetary base temporarily, offering a reversible tool that can help fine-tune money supply changes without making permanent alterations.

Outright Bond Purchase

An outright bond purchase involves buying securities with the intent of permanently increasing the monetary base. This strategy has a lasting impact on liquidity and money supply, making it less flexible than repurchase agreements when the need for adjustment might be temporary or subject to future changes.

Monetary Base

The monetary base comprises the currency in circulation and the reserves held by financial institutions at the central bank. Managing the monetary base is essential for influencing overall liquidity conditions and ensuring that there is enough money circulating in the economy.

Float

Float refers to the amount of funds in transit or the lag between when payments are made and when they clear. A decrease in float can signal tighter liquidity conditions, prompting financial managers to adopt measures, such as repurchase agreements, that can quickly and temporarily adjust the monetary base to maintain desired liquidity levels.

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