CFA Practice Question

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CFA Practice Question

To achieve its objectives, the Fed uses three main policy tools which include all of the following except ______

I. setting the discount rate.
II. conducting open market operations.
III. setting required reserve ratios.
IV. setting the federal funds rate.
Correct Answer: IV

User Contributed Comments 10

User Comment
rethan Someone please explain.
magicchip federal fund rate is the rate at which banks borrow from each other. The Fed sets the discount rate.
Jolen isnt the federal funds rate practically zero right now??? banks aren't lending to each other.
Drzewes If they don't lend to each other than FFR must be really high. If it was close to zero, more and more lending would take place.
JHeld You have to realize the FFR is a Target not actual. The target gives the market a expectation for future discretionary acion. Discout rate is the rate which banks can borrow from the Gov.
ilgibe Now FFR is barely less than rate on JPY deposits!
and thus even if banks are not lending to each others. the reason is the high liquidity injections provided by central banks to the market: it's safer to get money from them that from the market..
msoentoro Isn't Fed the one who determine the target FFR through instrument rule and targeting rule?
guida can some one explain how the discount rate affects the foreign exchange rate of a country?
2014 The interest rates of developing countries are not stable. To remove this drawback. Central banks of developing countries would tie their exchange to a currency, who has stable inflation such as the United States. So now developing country would target their exchange relative foreign currency in manner that relative prices in both countries are same.By this, the developing country plans to import inflation protection from the targeted country with stable inflation. To make this happen, the developing creates massive reserves. Now suppose, due high growth in developing countries inflation rises more than developed country. So the exchange rate of developing country would fall. Now this developing country would support their currency with the help of foreign reserves. And also increase interest rates. combination would strengthen exchange rate and reduce inflation. I hope this helps
geofin You need to separate between:
-Federal Funds Target Rate which is set by the Fed, and
-Federal Funds (Effective) Rate which is negotiated by the banks themselves.
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