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SCIENCE: A discipline, or topic of study, that uses the scientific method to investigate and explain the operation of the world by testing and verifying hypothesized relationships. While the term science is often used in reference to the physical sciences, including chemistry, physics, and biology, it's also relevant to social sciences, including economics, sociology, and political science. The reason is that science is not really a subject, but a method of investigation--the scientific method. The scientific method is uses theories to derived hypotheses which are verified against real world data.

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Lesson 20: Federal Reserve System | Unit 4: Monetary Policy Page: 15 of 20

Topic: Discount Rate <=PAGE BACK | PAGE NEXT=>

The discount rate is the interest rate the Fed charges for reserve loans to commercial banks.
  • The Federal Funds rate is for loans between commercial banks.
  • The discount rate is for loans from the Fed to commercial banks.
  • Banks borrow from the Fed when the need reserves to stay in business. The price they pay is the discount rate.

Why don't troubled banks use the Federal Funds Market?

  • Other banks are probably reluctant to extend a loan.
  • The entire banking system might be short of reserves.
  • The discount rate is typically lower than the federal funds rate.

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RISK

The quantitative probability of different future outcomes occurring. The assignment of probabilities can be subjective (based on a "feeling") or objective (based on historical data). Risk is related to the concept of uncertainty, which is simply not knowing what the future holds. People have three alternative preferences when confronting risk -- risk aversion, risk neutrality, and risk loving. Risk aversion is key to the provision of insurance.

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Today, you are likely to spend a great deal of time at the confiscated property police auction hoping to buy either a coffee cup commemorating the 2000 Olympics or a birthday gift for your grandmother. Be on the lookout for letters from the Internal Revenue Service.
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The first U.S. fire insurance company was established by Benjamin Franklin in 1752 in Philadelphia.
"Be kind and merciful. Let no one ever come to you without coming away better and happier."

-- Mother Teresa of Calcutta, humanitarian

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