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 0.25% . What is the federal funds rate, and what is the discount rate? federal funds rate:

Answer 1

Answer:

(a) The federal fund rate is the rate at which banks borrows funds from the other banks. So, the federal fund rate in this situation is 0.25%. This is normally applicable for the creditworthy organizations. It is set by the federal open market control. Open market operations is used by the federal bank to control the money supply in an economy and to set the federal fund rate.

(b) The discount is the rate at which banks borrows form the federal reserves account. In the current scenario, the discount rate is 1.15%. It is generally higher than the federal funds rate.