Which of the following is correct regarding the discount rate and the federal funds rate?
A) The discount rate is a market equilibrium rate, and the federal funds rate is fixed and unchanging.
B) The discount rate is a reduction in interest rates that is available to preferred bank borrowers, and the federal funds rate is the rate that the national government pays to borrow from the central bank.
C) The discount rate is the interest rate that banks pay to borrow from the central bank, and the federal funds rate is the rate that banks pay to borrow one another's excess reserves.
D) The discount rate is the interest rate that banks pay to borrow from each other, and the federal funds rate is the rate that they pay to borrow from the central bank.

Question

Quizplus · Accepted Answer

The discount rate is indeed the interest rate set by the central bank (such as the Federal Reserve in the United States) for loans it makes to commercial banks. The federal funds rate, on the other hand, is the interest rate at which banks lend reserves to each other overnight. This distinction highlights the roles of central bank policy and interbank lending in the financial system.

Which of the Following Is Correct Regarding the Discount Rate