Which of the following statements is true regarding the Fed's procedures for operating the discount window?
A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves.
C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The Fed's operating procedures and paying interest on reserves helps to contain the federal funds rate between the interest rate paid on reserves and the discount rate by providing banks with an alternative to borrowing from the discount window. This reduces the need for banks to borrow from the discount window and helps to stabilize the federal funds rate. Option B is incorrect because paying interest on reserves actually helps to reduce fluctuations in the federal funds rate by encouraging banks to hold excess reserves rather than lending them out on the open market. Option C is incorrect because, as explained above, the Fed's operating procedures and paying interest on reserves does have an impact on the fluctuation of the federal funds rate.

Which of the Following Statements Is True Regarding the Fed's