SIE practice questionmediumFederal Funds Rate
The federal funds rate is best described as:
- AThe rate the Federal Reserve charges member banks for emergency loans
- BThe interest rate banks charge their most creditworthy corporate customers
- CThe overnight lending rate between banks for reserve balances✓ Correct answer
- DThe rate on 10-year U.S. Treasury bonds
Explanation
Why C — The overnight lending rate between banks for reserve balances
The federal funds rate is the interest rate at which banks lend their excess reserves to other banks overnight. The FOMC sets a target range for this rate, and it is the primary benchmark for short-term interest rates in the economy. Choice A describes the discount rate (the rate the Fed charges banks for borrowing directly from the Fed's discount window). Choice B describes the prime rate. Choice D is a long-term Treasury yield.
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