The federal funds rate is the interest rate that banks pay when borrowing reserves from other:

• A. government agencies
• B. corporations
• C. consumers
• D. banks

Answer: (D)

Verified step by step guidance

1. Understand the definition of the federal funds rate: it is the interest rate at which banks lend reserves to each other overnight.
2. Recognize that the federal funds market involves transactions between banks, not between banks and government agencies, corporations, or consumers.
3. Recall that reserves are the funds banks hold at the Federal Reserve to meet reserve requirements and to settle interbank payments.
4. Identify that when a bank has excess reserves, it can lend them to another bank that needs reserves to meet its requirements, and the interest rate charged on these loans is the federal funds rate.
5. Conclude that the federal funds rate is the interest rate banks pay when borrowing reserves from other banks.