Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please help with a short reply to this discussion post. Hi Class! The federal funds rate is the cost of lending excess reserves from one

Please help with a short reply to this discussion post.

Hi Class!

The federal funds rate is the cost of lending excess reserves from one bank to a bank with lower reserves. It is essentially a domino effect, where the bank is paying a high amount of money to borrow money that they are then going to turn around and loan out to prospective borrowers. These prospective borrowers will then pay a higher interest rate to buffer the cost of the bank's cost of the federal funds rate. When interest rates are high this discourages the borrowing of money for individuals and businesses alike. When businesses are unable to borrow money to inject into the growth of the company, this slows the growth of the business and in some cases businesses end up closing when they don't have enough money to operate.

I touched upon the relationship between federal funds rate and interest rates, it is essentially passing the bill to the next borrower. If it costs the bank a lot of money to borrow the loan from the Fed, they will pass this extra cost onto anyone who is going to be borrowing the money to alleviate them of the extra cost. In this case, individuals and businesses suffer from high federal funds rates even though it is not something that anyone outside of banks perform transactions in.

Mankiw, N.G. (2021).The Monetary System. Principles of Economics 9th Edition.https://ng.cengage.com

Reply to Thread

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dynamic Business Law The Essentials

Authors: Nancy Kubasek

1st Edition

0073377686, 9780073377681

More Books

Students also viewed these Economics questions

Question

What are the application procedures?

Answered: 1 week ago

Question

8. What are the costs of collecting the information?

Answered: 1 week ago

Question

1. Build trust and share information with others.

Answered: 1 week ago