Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n)________ for the borrowing bank and a(n)________ for the lending bank.

Question

Quizplus · Accepted Answer

When a bank borrows funds from another bank in the market, it incurs a liability, which means it has to pay back the borrowed funds in the future. Therefore, the borrowing bank records a liability. On the other hand, the lending bank has given its excess reserves, which is an asset, to the borrowing bank, so it records an asset. Therefore, the correct answer is D: liability; asset.

Banks May Borrow from or Lend to Another Bank in the Federal