Question

Suppose that the Federal Reserve sets its target for the federal funds rate at a range of 0.25 to 0.50 percent.  This means that the discount rate on primary loans will be set at _____ percent and the discount rate on secondary loans will be set at _____ percent.

Select one:

a. 1.25; 1.50

b. 1.00; 0.50

c. 1.00; 1.50

d. 0.50; 1.00

e. 1.50; 1.00

Answer 1

The correct answer is ( a ).

The discount rate on primary loans will be set at 1.25 percent and the discount rate on secondary loans will be set at 1.50 percent.

Although federal funds rate is the benchmark interest rate, for those banks or financial institutions that need to borrow from the Federal Bank directly as a last resort in order to meet the reserve requirements, there are discount rates, the rate at which banks borrow from the Fed.

Even in discount rates there are primary loans and secondary loans. Interest rate on primary loans is always greater than that on secondary loans, and most importantly interest rate is lowest under federal funds rate.

Therefore, we can say ( a ) is the correct answer.