The federal funds rate A. equals the discount rate. B. only matters to banks and has very little impact on individual consumers. C. is set by the Federal Reserve Bank. D. is the rate that banks charge each other for short-term loans of excess reserves.

Question

Julian Mcgee

Business

7 February, 03:49

The federal funds rate A. equals the discount rate. B. only matters to banks and has very little impact on individual consumers. C. is set by the Federal Reserve Bank. D. is the rate that banks charge each other for short-term loans of excess reserves.

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Rhys Salas · Answer 1

D. is the rate that banks charge each other for short-term loans of excess reserves.

Explanation:

The federal reserves require banks to maintain a certain amount in their vaults to cater for possible withdraws. At the close of business every day, banks have to confirm they have the required amount. Should a bank fail to meet the requirement, it can borrow from other banks that have a surplus. The interest rate that banks charge each other for these transactions is the fed fund rate.

The Fed set the fund rate. It may increase or decrease it depending on the prevailing market condition. The banks use the fund rate set to determine the interest rates to be charged on loans and mortgages. A high fund rate means high-interest rates.