Why is the discount rate the upper bound for the federal funds rate?
A)It is set higher than the federal funds rate.
B)It is set lower than the federal funds rate.
C)The discount rate does not change over time.
D)The discount rate is the highest interest rate that banks can charge the public when they make loans.

Question

Quizplus · Accepted Answer

The discount rate is set by the Federal Reserve and serves as a benchmark for banks to borrow short-term funds directly from the Federal Reserve. It is typically set higher than the federal funds rate, which is the rate at which banks lend to each other overnight. This higher rate discourages banks from relying on the Federal Reserve for loans and encourages them to borrow from each other, making the discount rate effectively an upper bound for the federal funds rate.

Why Is the Discount Rate the Upper Bound for the Federal