Monetary Policy

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Written by:

Joan V


Date added:

May 23, 2011








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5 / 1359


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The discount rate is the rate at which banks can borrow money from the Federal Reserve. The rate rarely changes; its purpose is security for banks to avoid insufficient funds. The simulation provided an example of how the spread between the federal funds rate and the discount rate can affect the trend banks use when borrowing...
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If the discount rate interest is lower than the federal funds ratio banks are more inclined to shift their borrowing to the Federal Reserve which increases the total amount of money in circulation and is positive on the economy. However if the discount rate is higher than the federal funds rate banks will lend to other banks making no impact on the money supply...
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