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Unformatted text preview: to other banks since they could earn more by holding them (and get paid interest by the Fed). The point of the Fed supplying as much reserves as demanded by the banking system at the discount rate, and paying interest as a rate below the target fed funds rate, is to allow the Fed to control the Fed Funds rate maximum and minimum levels. In normal times, the market fed funds rate will equal the feds target, somewhere in the vertical portion of the supply curve. In an emergency (a large shift to the right in the demand for reserves), when the market fed funds rate shoots up, above the target, it wont go above the discount rate. And in a period (like now) when the supply of reserves has grown dramatically (S shifts to right), it allows the Fed to control a minimum Fed funds rate (the rate they pay on reserves)...
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- Fall '10