The interest rate that commercial banks charge each other fo

The interest rate that commercial banks charge each other for loans of reserves to meet their minimum reserve requirements is called:

treasury bill rate.

federal funds rate.

prime interest rate.

none of the above.

Solution

As a compliance of monetary policy each commercial bank has to maintain a specified percentage of deposit as reserve. It is known as minimum reserve requirement. If it is lower then bank has to borrow from other banks to maintain it. This borrowing is made by paying interest to the lender bank. This interest rate is known as Federal funds rate. Usually this borrowing or lendigs are made on overnight basis.

Treasury bill is short term lending or borowing instrument of money market. Interest rate of this bill is known as treasury bill rate.

Prime interest rate on the other hand is the interest rate which is offered to most favored customers who have highest credit worthiness. For other customers a certain percentage is added with prime rate to cover their extra risk factor due to less credit worthiness.

Answer: Thus correct answer is federal funds rate.