Asked by anmol setia on Jul 16, 2024
Verified
A bank finds itself short of required reserves and therefore borrows from another commercial bank.The interest rate on this loan is:
A) zero.
B) the prime rate.
C) the discount rate.
D) the federal funds rate.
E) the required reserve ratio.
Federal Funds Rate
The interest rate at which depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis.
Required Reserves
The minimum amount of funds that banks must hold in reserve against deposits, as mandated by the central bank.
- Acknowledge the impact and purpose of the Federal Reserve's measures on the reserves within banks and the extensive financial industry.
- Explain the operation of the federal funds market and the impact of interbank lending on the financial system.
Verified Answer
JP
Joaquinsito ParialJul 22, 2024
Final Answer :
D
Explanation :
The interest rate on interbank loans between commercial banks is typically set at the federal funds rate, which is the interest rate at which banks lend and borrow from each other in the federal funds market. This rate is determined by market forces and is influenced by the supply and demand of reserves in the banking system.
Learning Objectives
- Acknowledge the impact and purpose of the Federal Reserve's measures on the reserves within banks and the extensive financial industry.
- Explain the operation of the federal funds market and the impact of interbank lending on the financial system.