Question

9. The discount rate and the federal funds rate The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower spread between the discount rate and the federal funds rate decreases banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to 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 sell Treasury bills, the quantity of reserves in the banking system , banks' demand for borrowed reserves , and the federal funds rate

Answer 1

A lower discount rate will increase the money supply as the commercial banks will be able to borrow more

When Fed sells the bonds,it decreases the money supply which increases the federal funds rate

Blanks:

1) Increases

2) Increasing

3) Rise

4) Decreases

5) Rises

6) Increases