As a tool of monetary policy the effectiveness of the discount rate is __________ because __________.
A) Limited; banks will not borrow reserves from the Fed as long as they have ample excess reserves no matter how low the discount rate goes
B) Limited; banks will borrow reserves from the Fed whenever they need them as long as they have a reserve deficiency no matter how high the discount rate goes
C) very effective; changes in the discount rate leads changes in money market rates and thus assures that the injections and withdrawals of reserves from the banking system desired by the Fed will occur
D) very effective; banks will predictably increase borrowings from the Federal Reserve when the discount rate decreases and decrease borrowings when the discount rate increases

Question

Quizplus · Accepted Answer

Banks are unlikely to borrow from the Federal Reserve even if the discount rate is lowered, as long as they have excess reserves. This limits the effectiveness of the discount rate as a tool of monetary policy.

As a Tool of Monetary Policy the Effectiveness of the Discount