Question

Which of the following is the interest rate that the federal reserve charges to private banks that borrow directly from it?

a. The federal funds rate

b. Bond rate

c. The inflation rate

d. The discount rate

e. The prime lending rate

Answer 1

Answer - The Federal fund rate

Reason - banks have a requirement to maintain a non interest bearing deposit at federal bank. This is called reserve requirement. This is a minimum threshold bank need to maintain with the federal reserve.

When a bank have an excess of deposit in federal reserve they can lend the excess of it to other banks who are having shortfall in meeting the reserve requirement and earn interest on the borrowed amount at federal find rate. It is the rate at which federal reserve money is lend to private banks who borrows money from it.