Question

The discount rate is the interest rates on loans that the Federal Reserves makes banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A higher discount rate________ (increases or decreases) banks' incentives to borrow reserves from the Federal Reserve, thereby________ (increasing or reducing) the quantity of reserves in the banking system and causing the money supply to________ (fall or rise).

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 govenment bonds, the quantity of reserves in the banking system ________ (decreases or increases), banks' demand for borrowed reserves________ (declines or rises), and the federal funds rate (increases or decreases).

Answer 1

The discount rate is the interest rates on loans that the Federal Reserves makes banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A higher discount rate DECREASES banks' incentives to borrow reserves from the Federal Reserve, thereby REDUCING the quantity of reserves in the banking system and causing the money supply to FALL. THE BANK HAS LESS MONEY TO LOAN, SO ITS ABILITY TO "CREATE" MONEY THROUGH THE ISSUE OF LOANS IS REDUCED.

The federal funds rate is the interest rate that banks charge one another for short-term OVERNIGHT loans. When the Federal Reserve uses open-market operations to buy government bonds, the quantity of reserves in the banking system INCREASES, banks' demand for borrowed reserves RISES, and the federal funds rate DECREASES. THE FED WILL ADOPT AN EXPANSIONARY MONETARY POLICY BY BUYING BONDS FROM BANKS AND INCREASING THE AMOUNT OF MONEY THEY CAN LOAN.