1.Which of the following is a rate that should theoretically serve as a floor fo
ID: 1169290 • Letter: 1
Question
1.Which of the following is a rate that should theoretically serve as a floor for the Fed funds rate?
a.The discount rate
b.U.S. dollar Libor
c.The rate of interest on excess reserves (IOER)
2.If a security dealer "repos securities," they are a
a.borrower of collateral.
b.borrower of funds.
c.lender of funds.
3.A dealer is said to be running a "matched book" if
a. if the dealer's total assets equals total liabilities plus equity.
b.a 3 month loan to Bank A is funded with a 2-month loan from Bank B.
c.if the dealer's assets and liabilities are matched in terms of market value.
d. if the dealer's assets and liabilities are matched in terms of maturity.
4.An increase in the supply of reserves in the banking system leads to an increase in the Fed funds rate.
a.True
b.False
Explanation / Answer
Q1.
Federal Funds rate is the rate that banks charge each other for borrowing excess reserves from one another.
Rate of interest on excess reserves (IOER) refers to the rate that Fed pays to banks on excess reserves kept by them with Fed.
If Federal Funds Rate is below the rate of interest on excess reserves (IOER) then in that case banks will find it profitable to keep their excess reserves with Fed rather than supplying then in Federal Funds Market.
So, in order to induce banks to supply excess reserves in Federal Funds Market, federal funds rate must be equal to or higher than the rate of interest on excess reserves (IOER).
Thus, rate of interest on excess reserves (IOER) should theoretically serve as a floor for the Federal Funds Rate.
Hence, the correct answer is option (c).
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