Money and Banking

[Name of the Institute]

Question 1:

Required Reserve Ratio

The required reserve ratio is the amount of cash that should be kept with the central bank or in the vault of the bank itself, in a specific and predefined ratio, decided by the central bank of the country. The reserve ratio tends to affect the monetary policy, mainly by affecting the rate of interest that the bank provides to the customers. The bank reserve and the money supply move inverse to each other. For instance if a bank has to keep the higher reserves, they will have less money available to supply in the form of the loans and therefore the money supply tends to be lower in the market and vice versa.

Federal Reserve Discount Rate relative to the Federal Funds Rate

As far as the Federal Reserve Discount Rate is concerned, it simply alter the amount of money that is taken by the bank from the Federal Reserve, because discount rate determines the amount of interest the bank has to pay to the Federal Reserve. If the discount rate is higher, the bank tends to borrow less amount of money and additionally it also charges a greater interest to the consumer and hence the money supply tends to be less due to the higher discount rate. As far as the Federal funds rate is concerned if this rate tends to be higher the bank will borrow less money from another bank due to the higher weighted average rate that are mainly the determinant of the Federal Funds rate and therefore in this case also the rate works as the determinant of the money supply.

Open Market Operations

The highest portion of the Open Market Operations is defined by the lending and the borrowing of the bonds that are issued by the Federal ...