The Economics of Contemporary Banking: Conceptual Questions and Solutions

Intermediate Macroeconomics Problems and Solutions - Section 9

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.

Problem 41. What is the discount rate?

(a) The amount of funds that a depository institution must hold in reserve against deposit liabilities.
(b) The rate other banks in the Federal Reserve system charge each other for overnight loans.
(c) The rate at which the Fed charges banks for overnight loans.
(d) The rate which the Fed charges the government for loans.
(e) The target interest rate which the Fed seeks to bring about.
(f) The currency-deposit ratio that the Fed mandates for the economy.

Solution 41. The discount rate is

(c): The rate at which the Fed charges banks for overnight loans.

Problem 42. Which of these statements about the federal funds rate (ffr) are true? More than one answer is possible.

(a) The ffr rate other banks in the Federal Reserve system charge each other for overnight loans.
(b) The ffr is the rate at which the Fed charges banks for overnight loans.
(c) The ffr is the rate which the Fed charges the government for loans.
(d) The ffr is most often greater than the discount rate.
(e) The ffr is most often less than the discount rate.
(f) The ffr is the same as the discount rate.

Solution 42. The following statements about the federal funds rate (ffr) are true:

(a): The ffr rate other banks in the Federal Reserve system charge each other for overnight loans.
(e): The ffr is most often less than the discount rate. It is desirable for banks to first try to lend to each other before resorting to the Fed.

Problem 43. In which of these situations would high-powered money be created? More than one answer is possible.