Which of the following are TRUE about the Federal Funds Rate? (Select all that apply.) a....

Which of the following are TRUE about the Federal Funds Rate? (Select all that apply.)

a. It is influenced by the Federal Reserve

b. It is a rate at which banks can borrow long-term cash reserves

c. It is set in the market

d. It is the rate at which banks can borrow cash reserves on an overnight basis

e. It is the rate at which individual investors may borrow cash from the Federal Reserve

Solutions

Expert Solution

The TRUE statements about the Federal Funds Rate are -

It is influenced by the Federal Reserve
It is set in the market
It is the rate at which banks can borrow cash reserves on an overnight basis

Therefore option a, c & d are the right options

The federal funds rate is the short term interest rate that banks (depository institutions) charge in inter-bank transactions to lend Federal Reserve funds on overnight basis. These lending and borrowings between banks occurs to maintain Federal Reserve requirements that banks have to maintain with them for their smooth business operations. The banks also use this rate as a base rate in all other short term interest rates. For long term also, the banks use the federal funds rate as a reference rate for their deposits, bank loans, credit cards etc. The federal funds rate also influences the economy of the country by controlling the supply of the money in the economy.

jeff jeffy answered 1 year ago

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