7) Explain why the equilibrium federal funds rate cannot rise above the discount rate. Draw a...

7) Explain why the equilibrium federal funds rate cannot rise above the discount rate. Draw a graph of the supply and demand for reserves where there is discount lending.

Expert Solution

elastic at the discount rate. This is why the equilibrium federal funds rate can never be over the discount rate. Because, then the banks will simply borrow from the Fed and earn arbitrage return by lending them in the overnight market at a higher rate, i_ff.

Rahul Sunny answered 1 year ago

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