Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

What is the lending rate between banks at the Federal Reserve called?

1. Discount Rate

2. Interest Rate

3. Federal Funds Rate

4. Libor Rate

The correct answer is: Federal Funds Rate

The lending rate between banks at the Federal Reserve is referred to as the Federal Funds Rate. This rate represents the interest banks charge each other for overnight loans of their excess reserves held at the Federal Reserve. It is a critical tool for monetary policy because changes in the Federal Funds Rate influence overall economic activity, as it affects the availability and cost of money in the economy. The Federal Funds Rate is a key indicator of the health of the economy and can impact various lending rates for consumers and businesses, such as mortgages and other loans. The rate is determined by the market but is influenced by the Federal Reserve's monetary policy actions. While "Discount Rate," "Interest Rate," and "Libor Rate" are related financial terms, they do not refer specifically to the rate at which banks lend to one another at the Federal Reserve. The Discount Rate, for instance, is the interest rate the Federal Reserve charges banks for short-term loans, while the Libor Rate is an international benchmark rate that some banks use to lend to one another. Therefore, the Federal Funds Rate is the most accurate term for the specific scenario presented in the question.