Question

The prime interest rate
affects investment spending, while the federal funds rate affects consumption spending.
affects consumption spending, while the federal funds rate affects investment spending.
has no effect on exchange rates and net exports.
affects investment spending, while the federal funds rate affects overnight borrowing of bank reserves.

Answer 1

Banks base the interest rates for various loan, credit card, and line of credit kinds on the prime rate.

How does the amount of bank reserves affect the federal funds rate?

When the market's demand for reserves exceeds the market's supply of reserves, the federal funds rate rises; when the opposite is true, the rate falls.

A bank's reserves are the amount of cash it keeps on hand. A bank's goal to maintain a specific level of reserves may change as its regular transactions and deposits change. When a bank temporarily needs more reserves, it can borrow from other banks that are willing to lend to it because they have more reserves than they do.

The financial market where interbank lending occurs in the United States is known as the federal funds market, and the federal funds rate is the applicable interest rate.

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