Question

Complete the following in 450-500 word essay. As an assistant quantitative analyst for this bank, what can you assume from these results? What recommendations can you provide to your senior manager on loan rates, depending on the Federal Reserve System's ratio percentage? What should the bank do when the Fed raises the discount rate and the Federal Funds Rate? What should the bank do when the Fed increases and decreases the reserve ratio to change the reserve requirement?

Answer 1

The cash reserve ratio represents that part of a Bank’s capital which should Mandatorily be deposited with the Federal Reserve to ensure that operations can be conducted in the economy.

These ratios are generally changed to accommodate for inflation or deflation by reducing or increasing the supply of money in the economy. For example, during times of inflation, the Federal Reserve increases the Cash Reserve Ratio rates, thereby it reduces the total supply in the economy of currency as the commercial banks need to deposit more money and vice versa.

My suggestion would be that when the Federal Reserve Increases the Cash Reserve Ratio, we must increase the interest rates to be able to retain our profits and similarly we should decrease the interest rates when we have extra availability of cash due to increased liquidity.

The same is the case with discount rates which the Federal Reserve grants. Discount rate is the rate at which the Federal Reserve grants loans to commercial players. With an increase in the same we should pass over the same to the consumer and with a decline, accordingly we must reduce the interest rates.

All these exercises help in assuring that we can maximize our profit margins.

Please feel free to ask your doubts in the comments section.