Question

To make sure that the federal funds rate does not fall much below the floor set by the interest rate on excessreserves, the Federal Reserve has set up the ________ facility in which these nonbank lenders can lend to theFed and earn an interest rate that is close to the interest rate the Fed pays on excess reserves.A)Primary Dealer CreditB)reverse repoC)Term Securities LendingD)Term Auction

Answer 1

Option B is the correct answer. The Federal Reserve will have to set up the Reverse Repo facility in which these nonbank lenders can lend to the Fed and earn an interest rate.

In order to make sure that the federal funds rate does not fall below the floor which has been set by the interest rate on excess reserves, the Federal Reserve needs to set up the Reverse Repo facility which will let the nonbank lenders that can lend to the Fed and earn an interest rate that is close to the interest rate the Fed pays on excess reserves.

Hence, the correct answer is Option B.

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