The discount rate and the federal funds rate

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The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower discount rate_____ banks' incentives to borrow reserves from the Federal Reserve, thereby______ the quantity of reserves in the banking system and causing the money supply to______ .

The federal funds rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Federal Reserve uses open-market operations to sell government bonds, the quantity of reserves in the banking system_____ , banks' demand for borrowed reserves______ , and the federal funds rate_____. (fill in the blanks).

Reference no: EM13773892

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