Question

At the end of the day ABC Bank loans a significant amount of money and, as a result, does not have enough money in reserves to meet the federal reserve ratio. What can ABC Bank do to meet the federal reserve ratio?

Select one:

a. Borrow money from DEF Bank at the discount rate.

b. Loan more money to another bank called DEF Bank.

c. Borrow money from DEF Bank at the federal funds rate.

d. Nothing. ABC Bank will not meet the federal reserve ratio.

Answer 1

The answer is (C): Borrow money from DEF bank at the federal funds rate

Option (a) is not correct, because the ABC bank cannot borrow money from DEF bank at discount rate, because discount rate is the rate at which the banks borrow from the Federal Reserve Bank.

Option (b) is not correct because, when the bank itself doesn’t have money, it cannot lend to anyone else

Option (c) is correct because the ABC bank can borrow from any other bank to maintain its reserves. It borrows at federal funds rate.

Option (d) is not correct, because it is mandatory that all the banks must meet federal reserve ratio.