Question

Bank Of The North issued many large loans to their customers. An audit of the bank’s records shows that the bank is now below the Federal Reserve’s minimum reserve requirement. The Fed lends the bank the amount necessary to bring its reserves up to the required level. Bank Of The North will have to pay interest on the money that it borrowed from the Fed. The interest rate that is paid to the Fed on this loan is called the:

a) Discount rate.
b) Prime rate.
c) Federal funds rate.
d) LIBOR rate.

Answer 1

The interest rate paid by Bank Of The North to the Federal Reserve for the borrowed money to meet the reserve requirement is called the discount rate.

Step-by-step explanation:

When Bank Of The North issues many large loans to their customers and finds itself below the minimum reserve requirement set by the Federal Reserve, it must borrow the amount necessary to meet those reserves. The interest rate that Bank Of The North will have to pay on the money borrowed from the Fed is referred to as the discount rate. The discount rate is typically set higher than the federal funds rate, which is the rate at which banks lend to each other. The prime rate, a separate interest rate, is the rate at which banks lend to their most credit-worthy customers and is typically higher than the discount rate. While open market operations are the preferred tool for executing monetary policy, the discount rate still plays a role in the financial system.