Question

“The only way that the Fed can affect the level of borrowed reserves is by adjusting the discount rate.” Is this statement true, false, or uncertain? Explain your answer.

Short answer

Acquired saves are impacted by the Fed's bank after all other options have run out of activities and by its open market tasks. So the statement is false.

Step-by-step solution

Concept Introduction

The Fed can urge or deter banks to get saves by changing the rebate rate yet can't straightforwardly control the volume of acquired holds (markdown advances).

Explanation

This is a result of the way that the choice to take a rebate advance is made by the banks and is subsequently not constrained by the Fed. Banks as a rule acquire holds from the government finances market, a substitute for getting (taking a rebate advance) from the Fed.

The degree of acquisition from the government finances market is affected by the administrative assets rate. Generally speaking, changes in the markdown rate have no impact on the government finances rate, as the rebate rate is set at a more significant level, ordinarily by 100 premise focuses (1%) over the administrative assets rate.

Accordingly, in the typical case, changes in rebate rates have no effect fair and square of acquired holds. Nonetheless, provided that the government subsidizes rate is extremely high, and equivalents the rebate rate, would the Fed influence the volume of acquired holds by fluctuating the markdown be able to rate.

Different Ways

There are two different ways by which the Fed can impact the degree of markdown advances or acquired saves:

(1) The principal channel is by going about as the moneylender after all other options have run out, wherein the Fed gives stores to the banking and the monetary framework to abstain from banking and monetary emergencies, as on account of the subprime monetary emergency, Black Monday stock market crash etc.

(2) The Fed can also influence the level of borrowed reserves indirectly by influencing the federal funds rate through open market operations. An open market sale (purchase) will reduce (increase) reserves in the banking system, and increase (decrease) the level of borrowed reserves if the federal funds rate rises above (falls below) the discount rate.

Graphical Representation

Explained by figure:

In the chart over, the Fed cuts non-acquired saves by making open-market deals of securities. This causes the government supports rate to increase over the rebate rate, inciting banks to get from the Fed.

As an outcome, the whole reserves possessed by banks $R_2$will be equivalent to NBR2 supplied by the Fed and secured borrowed straight from the Fed (BR).

Final Answer

It isn't a fact that the Fed can influence acquired holds by shifting the markdown rate. Acquired saves are impacted by the Fed's bank after all other options have run out of activities and by its open market tasks. So the statement is false.