The reserve requirement is 20%. Assuming banks have no desire to hold excess reserves, calculate the money multiplier. Now assume the banks want to hold 20% of their reserves in addition to those required. Calculate the new money multiplier.
The tables below list two scenarios that relate the discount rate (the rate at which banks can borrow from the Federal Reserve) to the federal funds rate (the rate at which banks can borrow from one another). Why is the discount rate higher than the federal funds rate in the first case? Why is the federal funds rate higher than the discount rate in the second case? (Hint: Which case is associated with the Fed limiting the amount of money it will lend banks? Which is associated with no such limitation?
|
Case 1
|
|
Case 2
|
|
Fed Funds Rate
|
3%
|
|
Fed Funds Rate
|
5%
|
|
Discount Rate
|
4%
|
|
Discount Rate
|
7%
|