Question

As an assistant quantitative analyst for this bank, what can you assume from these results?

1. What recommendations can you provide to your senior manager on loan rates, depending on the Federal Reserve System's ratio percentage?

2. What should the bank do when the Fed raises the discount rate and the Federal Funds Rate?

3. What should the bank do when the Fed increases and decreases the reserve ratio to change the reserve requirement?

Answer 1

( 1 ) The senior manager should maintain the nominal loan rate at the time of the stable ratio percentage of the Federal Reserve System . Its totally dependent upon the situation of the economy and the FRS ratio . If its raised then the flow of the more amount of money will be deposited by the banks to the Federal Bank which means there will be rise in the rate of the loan . Where as if there will be increase in the ratio percentage of the Federal Reserve System then the rate of loan will decreased by the banking system .

( 2 ) The Fed Funds Rate is the rate that banks must pay when they borrow from one another . In the situation when Fed raises the discount rate and the federal funding rate , when there will be rise in the discount rate the interest rate will rise and due to that the supply of money will reduce in the economy and inflation will low down the bank must charge respectively high interest rate on the borrowing and in the situation of raise in the Fed Funding Rate they must reduce the transactions with the other banks .

( 3 ) In this situation if Fed has decided less reserve ratio through the application of the monetary policies , the bank must keep less amount of money in there hands and must increase the flow of money in the economy due to which there will be increase in the numbers of loans which will lead it to the development of the economy as a whole and the rate of inflation . VICE VERSA , when there is the reduction in the reserve ratio the bank must store the money to them and reduce the supply of money in the economy .