Question 11

11. How the Fed Influences the Reserve Ratio The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed's primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves. An increase in the interest rate on reserves tends to encourage banks to hold reserves. Grade It Now Save & Continue3. The kinds of money Despite the fact that personal possession of currency is not allowed by U.S. prisons, in reality, incarcerated people still exchange goods and services. Until 2003, the year in which the U.S. government banned smoking in federal penitentiaries, cigarettes were the preferred medium of exchange among prisoners. A main difference between using cigarettes and using dollars as money is that have intrinsic value. Cigarettes are an example of money. Grade It Now Save & Continue10. The discount rate and the federal funds rate The Federal Reserves establishes the interest rate charged on funds it loans to banks and other financial institutions. A higher interest rate the incentive to borrow funds from the Federal Reserve, thereby the quantity of reserves in the banking system, which causes the money supply to When the Federal Reserve loans more funds to banks and another financial institutions, the quantity of reserves in the banking system and the money supply Grade It Now Save & Continue