In a floor system
A)the central bank's deposit rate determines the overnight interest rate.
B)interest rates are highly variable.
C)the central bank must intervene each day to achieve its interest rate target.
D)the central bank's lending rate determines the overnight interest rate.
E)reserves are essentially zero.

Question

Quizplus · Accepted Answer

In a floor system, the central bank's deposit rate is the minimum interest rate that banks can earn on their reserves with the central bank. This rate sets a floor for short-term interest rates in the market, meaning that the overnight interest rate cannot fall below this rate. Therefore, the central bank's deposit rate determines the overnight interest rate.

In a Floor System