Final answer:
The statement that federal funds are loans from the Fed to member banks is incorrect. Federal funds are overnight loans made between banks to help each other meet reserve requirements. The federal funds rate is influenced by the Federal Reserve's open market operations and is a sensitive indicator of monetary policy changes.
Step-by-step explanation:
All of the following are true of Federal funds EXCEPT the:
a. represent funds over reserve requirements.
b. are overnight loans.
c. are very sensitive indicators of rates.
d. are loans from the Fed to member banks.
The correct answer here is d. Federal funds are not loans from the Federal Reserve to member banks. Instead, the Federal Reserve influences the federal funds rate, which is the interest rate at which banks lend funds to each other on an overnight basis. These loans take place between banks to maintain the reserve requirement, which is the minimum amount of reserves a bank must hold and not lend out.
When banks have reserves exceeding this requirement, they can lend the excess amounts to other banks that may need additional funds to meet their reserve requirements. The federal funds rate is a sensitive indicator of monetary policy changes, demand for credit, and overall economic conditions. It's also influenced by the open market operations conducted by the Federal Reserve, involving buying or selling Treasury bonds to affect the quantity of money and the level of interest rates.
By contrast, the discount rate is the interest rate the Federal Reserve charges commercial banks for loans, making them a 'lender of last resort' in times of financial crisis. This is a separate mechanism from the interbank lending that defines the federal funds market.