Why does changing the discount rate up or down have little impact on a bank's behavior?Select the two correct answers below. Select all that apply:Because banks are expected to first borrow from other available sources, like other banks.Because the Federal Reserve charges a higher discount rate than the rate of federal funds.Because of regulations which limit the amount of funds available at the discount windows.Because of congressional limits on the ability of the Federal Reserve to provide banks with loans.
Question
Why does changing the discount rate up or down have little impact on a bank's behavior?Select the two correct answers below. Select all that apply:Because banks are expected to first borrow from other available sources, like other banks.Because the Federal Reserve charges a higher discount rate than the rate of federal funds.Because of regulations which limit the amount of funds available at the discount windows.Because of congressional limits on the ability of the Federal Reserve to provide banks with loans.
Solution
The two correct answers are:
- Because banks are expected to first borrow from other available sources, like other banks.
- Because the Federal Reserve charges a higher discount rate than the rate of federal funds.
Explanation:
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Banks are expected to first borrow from other available sources, like other banks: Banks typically prefer to borrow from other banks or the open market before resorting to the discount window. This is because borrowing from the discount window often carries a stigma that the bank is in financial trouble.
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The Federal Reserve charges a higher discount rate than the rate of federal funds: The discount rate is typically higher than the federal funds rate. Therefore, it is more expensive for banks to borrow directly from the Federal Reserve than from other banks. This discourages banks from using the discount window unless they have no other options.
Similar Questions
What will happen in the money market if the Federal Reserve decreases the discount rate?Multiple choice question.Banks borrow more from the Fed and make more loans, causing the money supply to increase.Banks borrow less from the Fed and make fewer loans, causing the money supply to decrease.Banks borrow more from the Fed and make more loans, causing the money supply to decrease.Banks borrow less from the Fed and make fewer loans, causing the money supply to increase.
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One reason the Federal Reserve lowered the discount rate during the Great Recession was to:Multiple choice question.buy up all the defaulted mortgages from banks.allow banks to borrow at lower rates.stop banks from making risky loans.help consumers who had defaulted on their mortgages.
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