Select the correct answer.

What is the federal funds rate?

A. the interest rate that the Federal Reserve charges commercial banks for overnight loans

B.

the Interest rate that the Federal Reserve charges commercial banks for long-term loans

the interest rate that banks charge each other for long-term loans

D. the interest rate that banks charge each other for overnight loans

Reset

Next

D. the interest rate that banks charge each other for overnight loans

Explanation:

The federal fund rate is the interest rate that commercial banks charge each other for overnight lending. The banks borrow and lend from each other to meet their reserve requirements. The Fed requires banks to maintain a certain percentage of their deposits as reserve every day. A bank that falls short of its reserve requirement is allowed to borrow from the banks that have an excess.

A bank that lends to another bank charges an interest rate, which is the federal funds rate. The Federal Reserve sets the federal fund rate as part of its monetary policy. The Fed uses the federal fund rate to regulate the money supply in the economy.