What is termed as the rate charged by the Federal Reserve for loans to commercial banks?

What is termed as the rate charged by the Federal Reserve for loans to commercial banks?

• A. discount rate
• B. interest rate
• C. federal funds rate
• D. prime rate

Answer: (A)

The rate charged by the Federal Reserve for loans to commercial banks is known as the discount rate. This rate is significant as it influences the cost of borrowing for banks, which in turn can affect the overall supply of money in the economy. When banks borrow from the Federal Reserve, they typically do so at this rate, which is set by the Fed and can change based on economic conditions. The discount rate serves as a tool for monetary policy and often plays a critical role in managing inflation and stabilizing the economy. In contrast, the federal funds rate refers to the interest rate at which banks lend to each other overnight, while the prime rate is the interest rate that commercial banks charge their most creditworthy customers. The interest rate is a broader term that simply refers to the cost of borrowing money, without specifically pertaining to any one source or context. Understanding the distinction between these rates is important for comprehending how banking and finance operate within the broader economic framework.

The rate charged by the Federal Reserve for loans to commercial banks is known as the discount rate. This rate is significant as it influences the cost of borrowing for banks, which in turn can affect the overall supply of money in the economy. When banks borrow from the Federal Reserve, they typically do so at this rate, which is set by the Fed and can change based on economic conditions. The discount rate serves as a tool for monetary policy and often plays a critical role in managing inflation and stabilizing the economy.

In contrast, the federal funds rate refers to the interest rate at which banks lend to each other overnight, while the prime rate is the interest rate that commercial banks charge their most creditworthy customers. The interest rate is a broader term that simply refers to the cost of borrowing money, without specifically pertaining to any one source or context. Understanding the distinction between these rates is important for comprehending how banking and finance operate within the broader economic framework.