ECONOMICS
FEDERAL RESERVE
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
banks pay a higher interest rate if they borrow from the Fed.
|
|
|
banks pay a lower interest rate if they borrow from the Fed.
|
|
|
banks find it more profitable to increase their loans to businesses.
|
|
|
banks increase their lending to the Fed.
|
Detailed explanation-1: -The Fed also sets the discount rate, the interest rate at which banks can borrow directly from the central bank. If the Fed raises interest rates, it increases the cost of borrowing, making both credit and investment more expensive. This can be done to slow an overheated economy.
Detailed explanation-2: -An increase in the discount rate makes it less profitable for banks to borrow from the Federal Reserve. As banks reduce their borrowing, the total reserves of the banking system are reduced and the quantity of money supplied by the banking system declines.
Detailed explanation-3: -Setting a high discount rate tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions. This could be considered a contractionary monetary policy.
Detailed explanation-4: -If the Fed decreases the discount rate (interest rates), more banks will take out loans and the overall money supply will increase. If the Fed increases the discount rate (interest rates), less banks will take out loans and the overall money supply will decrease.
Detailed explanation-5: -The Federal Open Markets Committee (FOMC) sets the federal funds rate-also known as the federal funds target rate or the fed funds rate-to guide overnight lending among U.S. banks. It’s set as a range between an upper and lower limit. The federal funds rate is currently 4.50% to 4.75%.