9. The discount rate and the federal funds rate Aa Aa The discount rate is the i

Question

9. The discount rate and the federal funds rate Aa Aa The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A higher spread between the discount rate and the federal funds rate banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to The federal funds rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Federal Reserve uses open-market operations to buy Treasury bills, the quantity of reserves in the banking system , banks' demand for borrowed reserves , and the federal funds rate increases decreases

Explanation / Answer

The federal funds rate , the quantity of reserves in the banking system increase, banks demand for borrowed reserves decline, federal funds rate decrease.

A higher spread causes incent, decreases incentive to borrow, decreasing reserves in the system, causing money supply to fall.

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