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 0.15% . What is the federal funds rate, and what is the discount rate

Answer 1

Answer: Federal Fund Rate = 0.15%

Discount rate = 1.15%

Step-by-step explanation:

The Federal Fund Rate is the rate at which banks can borrow money from other Banks and is listed as 0.15%. This rate is usually lower than the discount rate as is usually suggested by the Federal Open Market Committee.

The Discount rate is the rate at which Banks can borrow from the Fed which is stated to be 1.15%. This rate is set by the Fed and can be used to control interest rates by either reducing or increasing the cost of borrowing for Banks which banks then reciprocate.