10. (Mishkin 18.6) \"The federal funds rate can never be above the discount rate

Question

10. (Mishkin 18.6) "The federal funds rate can never be above the discount rate." Is this statement true, false, or uncertain? Explain your answer. 11. (Mishkin 18.15) Compare the methods of controlling the money supply-open market operations, loans to financial institutions, and changes in reserve requirements-on the basis of the following criteria: flexibility, reversibility, effectiveness, and speed of implementation. 12. (Mishkin 18.21) Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.

Explanation / Answer

First question is answered below

1.

The given statement is uncertain.

This is because if Fed funds rate surpasses the discount rate, then banks will go and borrow from Fed directly instead of going to other fellow banks at higher rates. Generally, however Fed funds rate is above discount rates because of the stigma associated with banks borrowing directly from Fed. So, it can be either caseo f Fed funds rate being greater or smaller than discount rate.

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