Question

1. If the federal funds rate is 12 percent and the discount rate is 5 percent, to whom will a bank be more likely to go for a loan another commercial bank or the Fed? Explain your answer.

2. If bank “A” received $15 million of new deposits and because of this the Fed receives $1,050,000 of required reserves from Bank “A”. What is the required reserve ratio that the Fed has set?

Answer 1

1.Since the discount rate is 5% which is much lower than the federal funds rate which is 12%, the bank will more likely to Fed for a loan as it will have to pay 5% interest on that loan. If the bank goes to another commercial bank then it will have to pay a 12% interest on that loan. So the bank is more likely to go to Fed. Federal funds rate is the interest rate charged by one bank to another bank on lending federal reserve fund to that bank. The discount rate is the interest that a commercial bank has to pay on taking loan from their regional Federal Reserve Bank's lending facility.

2. Let x be the required reserve ratio. Then x% of $15 million will be $1050000.

(X/100)* 15000000 = 1050000

X=1050000/150000 = 7

Therefore, the required reserve ratio is 7%.