The supply curve of reserves has two kinks in it: one at the _________________ and the other at the ____________________ rate.
A) interest rate that the Fed pays on reserves; discount
B) federal funds rate; discount
C) prime rate; discount
D) discount rate; federal funds rate

Question

Quizplus · Accepted Answer

The first kink in the supply curve of reserves occurs at the interest rate that the Fed pays on reserves because banks are willing to hold reserves up to that point. The second kink occurs at the discount rate, which is the interest rate at which banks can borrow reserves directly from the Fed. Beyond that point, banks are less willing to borrow reserves at higher rates. The federal funds rate is the rate at which banks lend reserves to each other overnight; it does not directly affect the supply curve of reserves. The prime rate is the rate that banks charge their most creditworthy customers for loans and is also not directly related to the supply curve of reserves.

The Supply Curve of Reserves Has Two Kinks in It