The Bank of Key West is not going to have enough reserves at the end of the busi

Question

The Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 1.15%. Second, it could borrow money from other banks at a rate of 0.45%. Using this information answer the following questions. 1. What is the federal funds rate? Number 2. What is the discount rate? Number 3. What would happen to other short-term interest rates if the Fed increases its federal funds rate target? O O O O They would decrease. They would become irrelevant. They would also increase. They should remain unchanged.

Explanation / Answer

1) Federal funds rate = 0.45%

2) Discount rate = 1.15%

3) Short term interest rates would also increase when federal funds rate target is increased (Option 3)

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