Butthe fed does not set the federal funds rate or

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Unformatted text preview: ee (FOMC) meets every 6 weeks to debate and set these interest rates. But…the FED does not set the Federal Funds rate or prime rate. Each is established by the interaction of lenders and borrowers. The FED can change the supply of excess reserves in the banking system and so it can obtain the market rates it wants. • To increase the Federal Funds rate, the FED sells bonds, excess reserves are reduced, lessening the amount available for overnight loans. This raises the Federal Funds Rate. The lower excess reserves also means less borrowing and less growth in demand deposits. Other rates (prime for example) rise as well. • To decrease the Federal Funds rate, the FED buys bonds, excess reserves are increased, increasing the amount available for overnight loans. This lowers the Federal Funds Rate. The higher excess reserves may mean more borrowing and growth in demand deposits. Other rates fall as well. 76...
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This note was uploaded on 02/03/2014 for the course ECON Foreign Ec taught by Professor Mates during the Fall '11 term at Indianapolis Metropolitan High Sch.

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