Final answer:
The Fed funds rate is the interest rate at which banks lend funds to each other overnight using the reserve balances they hold at the Federal Reserve. It's a key tool in the Federal Reserve's monetary policy and it influences many other interest rates in the economy. Correct answer is B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed.
Step-by-step explanation:
The Fed funds rate is the interest rate that banks charge each other for overnight loans of deposits on reserve at the Federal Reserve. This rate plays a critical role in the monetary policy of the United States and is a benchmark for many other important interest rates within the economy. The rate is determined by the market but heavily influenced by the Federal Reserve's open market operations, which involve selling or buying Treasury bonds to control the money supply and interest levels.
The federal funds rate is also the rate the Federal Reserve targets to achieve its monetary policy objectives, such as controlling inflation or managing economic growth. It is different from the prime rate, which is usually set higher and is the interest rate banks charge their most creditworthy corporate customers, and also different from the discount rate, which is the rate the Fed charges commercial banks for short-term loans. Correct answer is B. interest rate banks charge each other for overnight loans of deposits on reserve at the Fed.