ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Term Securities Lending
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Primary Dealer Credit
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Reverse repo
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Term Auction
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Detailed explanation-1: -The overnight reverse repurchase agreement facility is a supplementary tool because the rate the Fed sets for it helps set a floor for the federal funds rate (Figure 4).
Detailed explanation-2: -The federal funds rate is the target interest rate set by the FOMC. This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The FOMC sets a target federal funds rate eight times a year, based on prevailing economic conditions.
Detailed explanation-3: -Understanding Open Market Operations (OMOs) Open market operations is one of the tools that the Fed uses to keep the federal funds rate at its established target. The U.S. central bank can lower the interest rate by purchasing securities (and injecting money into the money supply).
Detailed explanation-4: -Essentially, paying interest on reserves allows the Fed to place a floor on the federal funds rate, since depository institutions have little incentive to lend in the overnight interbank federal funds market at rates below the interest rate on excess reserves.