Econ 201 Discussion 6 with Answers on Monetary Policy - What is the relationship between the Federal funds rate and the prime interest rate Why

Econ 201 Discussion 6 with Answers on Monetary Policy...

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What is the relationship between the Federal funds rate and the prime interest rate? Why doesn’t the Federal Reserve target the prime interest rate? How is the Federal funds rate established? What role does the Federal Reserve play? The federal funds rate and the bank prime rate are similar, since banks generally set the prime rate to track the federal funds rate. However, they serve different purposes. They're also both only tangentially related to mortgages. If you have purchased a home with a mortgage, chances are it wasn’t tied to either rate- but both share influence in the broader market and have some level of influence on adjustable rate loans. The money supply is tied to interest rates. If the Fed raises interest rates, the demand for loans will decrease, and consequently the rate of increase of the money supply via the banking system will decrease as less money will be pumped into the system. Basically, if the 'public' demands more money from the system, the Fed will make sure that it gets there. But if

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