Question
In: Economics
Identify the three significant interest rates for Federal Reserve Board policy-making. Explain your answer.
Identify the three significant interest rates for Federal Reserve Board policy-making. Explain your answer.
Solutions
Expert Solution
The three significant interest rates for Federal Reserve policy making are as follows:
1. Discount Rate - It refers to the interest rate the Federal Reserve charges on loans given to banks through the Fed's discount window loan process. When the Fed wants to increase the level of money supplied in the economy, then discount rate is reduced and when the Fed wants to reduce the level of money supplied in the economy then discount rate is increased.
2. Required Reserve ratio: This refers to the percentage of deposits which the commercial banks have to keep in the Fed. When Fed wants to increase the level of money supplied in the economy, then required reserve ratio is reduced and when Fed wants to decrease the level of money supplied in the economy, then required reserve ratio is increased by banks.
3. Federal Funds Rate: Federal Funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. These funds maintain the federal reserve requirement.
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