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Problem 7

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Economics for Today
Economics for Today

Economics for Today

Book edition 6 Edition
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Short Answer

The cost to a member bank of borrowing from the Federal Reserve is measured by the a. reserve requirement. b. price of securities in the open market. c. discount rate. d. yield on government bonds.

The cost to a member bank of borrowing from the Federal Reserve is measured by the discount rate. This is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's discount window. Hence, the correct answer is c. Discount rate.
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Step by Step Solution

TABLE OF CONTENTS :
TABLE OF CONTENTS

Step 1: Identify the Correct Term

Among the four given options, the correct term that measures the cost to a member bank of borrowing from the Federal Reserve is the discount rate. Typically, when member banks can't meet their reserve requirement or are short on reserves, they can borrow from the Federal Reserve's discount window. The interest rate charged for these loans is the discount rate. Therefore, it is the discount rate that directly measures the cost of borrowing for member banks. The higher the discount rate, the higher is the cost of borrowing for banks and vice-versa. In other words, the discount rate is a key policy tool used by the Federal Reserve to influence the cost of borrowing and thus influence the levels of economic activity. So, the correct answer is c. Discount rate.

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