What rate sets a floor for the federal funds rate a iorb...

What rate sets a floor for the federal funds rate? A. IORB rate B. ON RRP offereing rate C. Discount rate How does the discount rate serve as a ceiling for the federal funds rate? A. Banks should not be willing to pay higher than the discount rate when they borrow funds. B. Banks should not be willing to accept less than the discount rate when they deposit funds. C. Banks can borrow at the interest on reserve balances (IORB) rate and deposit at the discount rate if th ediscount rate drops too low.

Transcript

00:01 Here it is asked.

00:03 How is the interest on reserve balances rate? reservation rate, right? so the correct choice would be banks should not be willing to accept banks, so this is for question number one banks should not be willing to accept a lower rates a lower rate you can say for their funds so option number b is going to be the correct choice we have right moving forward with the next question of this part this question only okay let me just understand about this so interest rate on reserve balances that is iorb in short rate acts as a reservation rate because because it sets a floor below which banks are not willing to lend out their excess reserves.

01:23 Essentially, it represents the minimum return a bank is willing to accept for lending out its funds because banks can always earn the iorb rate by holding their reserves at the fed.

01:39 If the market offers a lower rate, banks would prefer to keep their reserves at the fed and earn the iorp rate instead of lending out at a lower rate.

01:57 Right now if you talk about the second question when the interest on reserve balances rate is higher than the federal fund rate federal funds rate how will banks likely respond so for the second question option number b is going to be correct okay let me just write this is fourth question right so this must be third question for sure okay now in fourth question option number b is going to be correct it says bank banks will borrow in the federal funds market and deposit funds at their federal reserve bank option number b is going to be correct for the fourth question so you can say that when the iorb rate is higher than the federal funds rate, banks have the arbitrage opportunity, right? so they can borrow funds at the lower federal funds rate and then deposit these funds at their federal reserve bank to earn the higher iorb rate.

04:06 This action is profitable because they earn more on their reserves.

04:10 Than they pay to borrow the funds...

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