ELEANOR: Nowadays, the Federal Reserve can influence household spending, business investment, production, employment, and inflation in the United States. Could someone explain how the Fed manages the interest rate levels?
BETH: The Fed does so by changing .
DARNELL: In order to do this, the Fed changes and .
ELEANOR: Suppose the current federal funds rate is 2.50% and the Fed wants to raise it. What should the Fed do?
BETH: The Fed needs to set the IOR rate the current federal funds rate, say, to .
ELEANOR: Please identify which of the following accurately explains the effect of this strategy by the Fed?
Banks will borrow reserves in the federal funds market at 2.50% and place those reserves on deposit with the Fed to earn 3.00%.
Banks will remove the reserves they hold with the Fed that earn 2.00% and lend out those reserves in the federal funds market to earn 2.50%.
DARNELL: As a result, reserves in the federal funds market , pushing the federal funds rate.
ELEANOR: What does the Fed need the ON-RRP rate for?
BETH: The Fed pays the ON-RRP rate to , which might lend at a federal funds rate that is than the IOR rate.