Question
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
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started