Series 7 practice questioneasyMoney Market — Federal Funds
The federal funds rate is the interest rate at which:
- AThe Federal Reserve lends to the US Treasury
- BThe government borrows from foreign central banks
- CConsumers borrow from the Federal Reserve
- DBanks lend excess reserves to each other on an overnight basis✓ Correct answer
Explanation
Why D — Banks lend excess reserves to each other on an overnight basis
The federal funds rate is the interest rate that depository institutions charge one another for overnight loans of excess reserves held at the Federal Reserve. It is a key benchmark interest rate that influences other short-term interest rates. The Federal Open Market Committee (FOMC) sets a target for the federal funds rate and uses open market operations to move the actual rate toward the target.
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