Which rate is the rate banks charge each other in the interbank market, typically above the discount rate?

• A. Prime Rate
• B. Fed Funds Rate
• C. Discount rate
• D. Call Rate

Answer: (B)

The rate banks charge each other in the interbank market is the federal funds rate—the interest rate for overnight borrowings of excess reserves among depository institutions. This rate is set by the market based on demand and supply for reserves and is influenced by the Fed’s target, but it reflects transactions between banks rather than a loan from the central bank. It’s the best answer because it directly describes the interbank borrowing rate, the benchmark for short-term funding in the banking system. The discount rate is the Fed’s lending rate to banks and is normally higher than the federal funds rate, which is why banks typically prefer market borrowing over borrowing from the Fed. The prime rate is the rate offered to top customers and patterns after the fed funds rate, while the call rate is not the standard measure in the U.S. today.