Question about monetary policy

Why repurchase agreement could decrease money supply and reverse repurchase agreement could increase money supply??Could someone explain it clearly?Thank you!

When Repo rate is low, Banks are likely to borrow money from Fed and buy back later. Consequently, this will increase money supply in the system as Banks now have more money to lend.

On the other hands, when Repo rate is high, Banks are not likely to borrow from Fed. Therefore, they are holding securities in their hands instead of cash. This will decrease money supply to the general economy .

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So when fed sell bonds and collect money,thats called repurchase agreement and when fed buy bonds back and give out money,thats called reverse repurchase,is that right?

Bank (Seller aka Borrower aka Repo) Vs Fed (Buyer aka Lender aka Reverse Repo).

When Banks sell securities (Near Leg) to Fed, Banks will buy back securities (Far Leg) at a higher price afterwards. (Repurchase agreement)

In contrast, Fed buys securities (Near Leg) from Banks, Fed will resell securities (Far Leg) to Banks at a higher price afterwards. (Reverse Repurchase agreement)

Sorry,I reckon that you are wrong,repurchase agreement is meant to decrease money supply,while reverse repurchase agreement is meant to increase it.

That is the big statement to claim, my friend!!! :upside_down_face:

When the Fed sells securities to the Bank and repurchase at a higher price at a later date. => Repurchase Agreement.

When the Fed buys securities from the Bank and resell at higher price at a later date. => Reverse Repurchase Agreement.

No. Go back and reread my statements.

Yes. The Fed injects liquidity into the mkt by entering into a Reverse repo transaction. In contrast, the Fed will take out liquidity by entering into a Repo transaction.