Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy primarily because

Question

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Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve because DI deposits are a major portion of the money supply. By changing the target for the federal funds rate, the Fed can influence interest rates across the economy, which in turn affects the borrowing and lending behavior of DIs. As DIs adjust their lending rates, this impacts the amount of credit available to households and businesses, which affects economic activity and inflation. Therefore, changes in monetary policy can have significant effects on the overall economy through the channel of DI lending and deposit activity.

Depository Institutions (DIs) Play an Important Role in the Transmission