The Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 1.35%. Second, it could borrow money from other banks at a rate of 0.45%. Using this information answer the following questions.
Required:
1. What is the federal funds rate
2. What is the discount rate
3. (multiple choice) What would happen to other short-term interest rates if the Fed increases its federal fund rate target?
a. They should remain unchanged
b. the would also increase
c. they would become irrelevant
d. they would decrease