ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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individuals
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corporations
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banks and financial institutions
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retailers-If the discount rate goes up, fewer banks will want to borrow from the Fed. Then banks will have fewer excess reserves available to loan out. A higher discount rate usually makes all borrowing more expensive. This slows down economic growth. Lowering the discount rate-A bank may want to borrow from the Fed if it has an unexpected drop in its reserves. Or, a bank could also have high seasonal demands for loans. For example, a bank in an agricultural area might face heavy demand during the planting season. If enough banks acted on the lower discount rate, total MBRs would increase. This would expand the money supply.
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Detailed explanation-1: -Banks can borrow from the Fed to meet reserve requirements . The rate charged to banks is the discount rate, which is usually higher than the rate that banks charge each other. Banks can borrow from each other to meet reserve requirements, which is charged at the federal funds rate.
Detailed explanation-2: -As described in more detail below, depository institutions have access to three types of discount window credit from their regional Federal Reserve Bank: primary credit, secondary credit, and seasonal credit, each with its own interest rate ("discount rate").
Detailed explanation-3: -The Fed lends at a higher rate than the market in order to ensure that it’s used as a last resort. The Federal Reserve does not lend money or provide bank accounts for individuals, as retail banks do.
Detailed explanation-4: -So to meet these requirements, a bank can borrow money from fed, known as discount loans. The discount loans are convenient because it requires no documentation. When there is a shortage of funds, a bank has only two options to borrow from other banks or federal reserves.
Detailed explanation-5: -Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for their holdings with the central bank. During high levels of inflation in the economy, the RBI increases the reverse repo.