Question

“The federal funds rate can never be above the discount rate.” Is this statement true, false, or uncertain? Explain your answer.

Short answer

The given statement that 'the federal fund rate can never be above the discount rate' represents an uncertain situation.

Step-by-step solution

Concept Introduction

U.S. depository institutions lend reserve funds to fellow depository institutions on an uncollateralized basis overnight at the federal funds rate. Fed reserves are used to meet the reserve requirements of depository institutions.

Explanation

The market for holds model intends that on the off chance that the public asset rate gets the discount rate, it won't ever arrive at the discount rate. This is on the grounds that the federal asset rate surpasses the discount rate then the banks would straight cash from the Federal Reserve rather than acquiring from the federal asset's business sectors. This will in favor additional control the expansion of the provided fund rate above the discount rate. In the empirical world, the federal fund rate can surpass the discount rate. This can be due to the stigma which is associated with the banks borrowing directly from the Federal Reserve. There is a stigma stating that the banks might prefer to pay a higher market rate than considering the option of borrowing directly from Federal Reserved.

Final Answer

Thus, the given statement that 'the federal fund rate can never be above the discount rate' represents an uncertain situation.