Future Business Leaders of America (FBLA) Securities and Investments Practice Test

Which interest rate relates to loans made between banks?

1. Prime rate

2. Fed funds rate

3. Discount rate

4. Loan rate

The correct answer is: Fed funds rate

The Fed funds rate is the correct answer because it specifically pertains to the interest rate at which banks lend money to each other on an overnight basis. This rate is crucial as it influences overall economic activity and monetary policy. It is determined by the market but also influenced by the Federal Reserve's monetary policy decisions. When banks have excess reserves, they lend to one another, and the rate at which these loans are made is the Fed funds rate. This rate is significant because it sets a benchmark for other interest rates in the economy, including the rates consumers see on loans, mortgages, and credit cards. Changes in the Fed funds rate can signal shifts in monetary policy to control inflation or stimulate economic growth. The other rates, while important, pertain to different contexts. The prime rate is the interest rate banks charge their most creditworthy customers, the discount rate refers to the interest rate the Federal Reserve charges banks for direct loans, and loan rates can vary widely depending on the type of loan and the borrower's creditworthiness. Thus, the Fed funds rate is distinct in its specific connection to interbank lending.