Why would the interest rate the Fed pays on reverse repurchase agreements set a

Question

Why would the interest rate the Fed pays on reverse repurchase agreements set a floor under? short-term interest? rates please pick one of the answers below:

A. Financial institutions are prohibited from lending at rates lower than that set in reverse purchase agreements.

B. Financial institutions use the interest rate on reverse purchase agreements to set the rates for institutional loans.

C. Financial institutions use the interest rate on reverse purchase agreements to set the rates for? inter-bank loans.

D. Financial institutions would be unlikely to lend elsewhere at a lower rate.

Explanation / Answer

Answer: Financial institutions would be unlikely to lend elsewhere at a lower rate.

Explanation: This is because of the high liquididty with the financial institutions and low lending oppotunities leads to situation where lending at lower rates than what is offered by the Federal Reserve Bank would be unremunerative.

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