Question

On a given day, the discount rate is 3.65%, the prime rate is 3.55%, the LIBOR is 3.30%, the federal funds rate is 3.25%, and the federal funds target rate is 3.20%

On the same day, Bank XYZ's reserve balance held at the Federal Reserve is lower than the reserve requirement, and Bank XYZ needs to borrow funds from those member institutions of the Federal Reserve who have excess funds in their reserve. Let x be the rate at which Bank XYZ borrows from these excess funds.
Determine x.
(A) 3.20%
(B) 3.25%
(C) 3.30%
(D) 3.55%
(E) 3.65%

Answer 1

Answer: (B) 3.25%

Step-by-step explanation:

Commercial banks are meant to keep a portion of their total deposits with the Fed. This is called the Reserve requirement. Every day, these commercial banks have to meet this reserve requirement but sometimes they cannot.

When this happens they can balance their account by borrowing from other banks or member institutions of the Federal Reserve who have an excess balance on their reserve. The rate at which they can borrow from these other institutions is called the Federal Funds Rate which according to the question is 3.25%. That is therefore x.