Question

If the Federal Reserve increases the spread between the federal funds rate and the discount rate, then the cost of a shortage of reserves _____ and the amount banks are willing to lend _____.

Answer 1

If the Federal Reserve increases the spread between the federal funds rate and the discount rate, then the cost of a shortage of reserves increases and the amount banks are willing to lend decreases.

Explanation:

The Federal Reserve is the central bank that is responsible for the money circulation all over the country. Its monetary policy regulates the money supply in order to increase the nation's economy. The Federal reserve always keeps its discount and interest ratio to be lower.

So that the banks can hold only less amount by providing more loans to customers (for individual or for businesses). If the discount rate and the Federal fund are increased the banks can hold more money with them. Also, they won't be allowed to provide more loans to their customers.