Question

What interest rate creates an upper limit on

the rate at which banks pay to borrow from
each other?
O Discount Rate
O Nominal Rate
O Interest on Reserves
*

Answer 1

Discount Rate

Step-by-step explanation:

The Discount Rate is the interest rate at which banks can borrow money from the Federal Reserve Bank. Banks can borrow money from the Fed to meet reserve requirements or to cover short-term funding needs. The Discount Rate serves as a benchmark interest rate for other short-term interest rates, such as the federal funds rate.

The federal funds rate is the rate at which banks lend to each other overnight to meet reserve requirements. Banks may borrow from other banks if they have a shortage of reserves, and the interest rate on these loans is influenced by the Federal Reserve's monetary policy decisions, including changes to the Discount Rate. The Discount Rate sets an upper limit on the federal funds rate, as banks will generally not want to pay a higher interest rate to borrow from another bank than they would pay to borrow directly from the Federal Reserve Bank.