Question

Incorrect Question 7 0/1 pts If the Federal Reserve charges 2.5% interest rate on loans to financially healthy banks and pays 1.75% interest on reserves held by the banks, the Effective Federal funds rate could possibly be 2.5% 2.25% 1.75% 1.5% 2.75%

Answer 1

In the given problem the federal bank lends its own funds @ 2.5% interest on loans and pays 1.75% of interest on reserves, this transaction basically called the effective federal fund rate where the federal bank lends amount to the bank. The amount which federal bank used to take back from the banks as a reserves called the reverse repo rate.

These all rate are used to set for the fortenightly basis so what so ever value we will have in calculation we have to multiply that % value with the 2.

Here in the fiven example, the rate at which the federal bank has lent funds is 2.5%

and the rate for the reserves which paid by the federal bank is 1.75%.

So, here in the case, the marginal funds rate will be as follows;

where we will take the 2.5% of lending rate minus the federal bank pays for the reserves is 1.75%

= 2.50% - 1.75%

= 0.75%

Now, as explained above we will multiply this with 2 to make it considerable.

so the % value will be,

= 0.75% *2

= 1.50%

i.e. the fourth option in the problem will be our answer to the problem.