Question

question
why does changing the discount rate up or down have little impact on a banks behavior?
select the two correct answers below.
select all that apply:

because banks are expected to first borrow from other available sources, like other banks.

because the federal reserve charges a higher discount rate than the rate of federal funds.

because of regulations which limit the amount of funds available at the discount windows.

because of congressional limits on the ability of the federal reserve to provide banks with loans.

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Explanation:

• Banks are expected to first borrow from other available sources like other banks (inter - bank lending). This means they don't rely heavily on the discount window (where the discount rate applies) for their borrowing needs.
• The Federal Reserve charges a higher discount rate than the federal funds rate. Banks would prefer to borrow at the lower federal funds rate (from other banks) rather than at the higher discount rate from the Fed, so changes in the discount rate have less impact.

Answer:

A. Because banks are expected to first borrow from other available sources, like other banks.
B. Because the Federal Reserve charges a higher discount rate than the rate of federal funds.