The overnight rate is determined by equilibrium in the market for ________. The overnight rate ________.
A)loanable funds; equals the real interest rate minus the inflation rate
B)reserves; is the rate that sets the quantity of reserves demanded equal to the quantity of reserves supplied
C)loanable funds; equals the real interest rate
D)reserves; equals the real interest rate minus the inflation rate
E)money; equals the real interest rate

Question

Quizplus · Accepted Answer

The overnight rate is the interest rate at which banks lend or borrow funds overnight from each other to meet reserve requirements. The market for reserves determines the overnight rate, and this market is characterized by the demand for reserves by banks and the supply of reserves by the central bank. The equilibrium point where the quantity of reserves demanded equals the quantity of reserves supplied determines the overnight rate. Therefore, option B correctly identifies the key factor that determines the overnight rate.

The Overnight Rate Is Determined by Equilibrium in the Market