econ423hw4essayanswer

econ423hw4essayanswer - Solutions to Essay Questions...

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Solutions to Essay Questions - Homework Quiz #4 Econ 423 15) Distinguish between the three types of Fed discount loans: primary credit, secondary credit, and seasonal credit. Solution: Primary Credit: Policy whereby healthy banks are permitted to borrow as they wish from the primary credit facility. The discount rate is the interest rate charged on this type of credit, and is usually set at 1% above the federal funds rate. Secondary Credit: Given to troubled banks experiencing liquidity problems. The interest rate on this type of credit is set at 50 basis points above the discount rate, as a penalty to discourage borrowing using this mechanism and to reflect the poorer financial condition of banks that choose this option. Seasonal Credit: Designed for small, regional banks that have seasonal patterns of deposits (vacation destinations, etc.). The Federal Reserve is considering eliminating these types of loans in the future.
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