Question

2. Identify the term or concept that fits each description. 35 pts A) The interest rate the Fed charges banks for short term loans. B) The most powerful monetary policy tool. C) The most used monetary policy tool. D) The interest rate banks charge each other for short term emergency loans. E) When the public choosing to keep money out of circulation. F) Government agency that protects depositors from bank failures (up to a limit). G) It is made up of the 7 Fed Governors as well as the 5 Federal Reserve Bank Presidents (Fed. Reserve Bank of NY is always represented).

Answer 1

A) The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. Hence, answer is discount rate.

B) Fed funds rate - can be deduced from the above statement itself.

C) The use of open-market operations is the most important tool for manipulating monetary policy. The Fed's goal in buying and selling U.S. government securities is to affect the federal funds rate – the rate at which banks borrow reserves from each other. The Federal Open Market Committee (FOMC) sets a target – or target range – for this rate, but not the actual rate itself (that’s determined by the open market). The target is what news reports are referring to when they talk about the Fed lowering or raising interest rates. Open market operations are the most frequently employed tool of monetary policy.

Hence, answer is open market operations.

(D) These banks will lend money in the interbank market, receiving interest on the assets. The interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow and lend money in the interbank lending market in order to manage liquidity and satisfy regulations such as reserve requirements.