Question

The federal funds rate is A. the interest rate that the Federal Reserve charges for its loans to banks. B. the interest rate that the banks charge for loans to its important commercial borrowers. C. the interest rate that banks charge each other for overnight loans. D. the required reserve ratio that the Federal Reserve requires banks to maintain.

Answer 1

Answer:

C. the interest rate that banks charge each other for overnight loans.

Explanation:

The Fed requires commercial banks to keep some amount of deposits as reserves in their custody. If a bank does not have the  required amount for that day, they borrow from banks with excess funds. The duration of this arrangement is usually overnight.  The interest rate that applies is the fed funds rate.  

The Fed, which is a committee of the FOMC, determines the fed funds rate. The Fed uses the fed funds rate as a monetary policy tool. It adjusts it to drive the economy in the desired direction. Banks base their interest rates on the fed funds rate.