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The Monetary System

What are the prime rate, the discount rate, and the federal funds rate? Who controls these rates? What would you expect to happen in the general economy if these rates are all increased? Decreased? Give examples.

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Prime rate:

The prime rate is a short term interest rate levied by commercial banks. Prime rate is mainly charged on credit worthy customers such as large corporations. According to Investopedia (2011), the prime rate is significantly influenced by the federal funds rate.

Discount rate:

The discount rate is the interest rate charged on commercial banks and other depository institutions on borrowing from the Federal Reserve Bank. The Discount Rate (2012) provides that the Federal Reserve Banks offer depository institutions three discount window programs that include primary credit, secondary credit, and seasonal credit.

Federal funds rate:

Federal funds rate is the interest rate that a depository institution lends to another depository institution Federal ...

Solution Summary

The prime rate, discount rate and federal funds rate are determined. The expert provides the solutions to determine who controls these rates.