Practice: 1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability

Section 1: Knowledge of Capital Markets. 12 question(s) in this unit's pool (2 above the exam). Free up to ten a day; the coach picks which ones based on what you have already answered and when each is next due.

Section 1: Knowledge of Capital MarketsSIE outline 1.3.1
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Today's practice

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. Questions you have already answered correctly and confidently stay out of the way until they are due for review again.

Question 1Exam level

How many members sit on the Federal Open Market Committee, and how many regularly scheduled meetings does it hold each year, per the Fed's own page?

How sure are you?

Correct: A. The Fed's own page states the FOMC consists of 12 members and holds 8 regularly scheduled meetings a year.
B. 7 is the Board of Governors' own count, not the full FOMC, and 4 understates the meeting count.
C. 19 overstates the FOMC's own stated membership.
D. Correctly states 12 members but overstates the meeting count; the Fed's own page states 8, not 12.

Unit: SIE outline 1.3.1

Question 2Exam level

Which body writes Regulation T, governing credit extended by brokers and dealers?

How sure are you?

Correct: A. Regulation T, 12 CFR 220, is written by the Board of Governors of the Federal Reserve.
B. FINRA enforces margin rules built on Regulation T but does not write the regulation itself.
C. The SEC oversees securities markets broadly, but Regulation T specifically is a Federal Reserve Board regulation.
D. The FOMC directs open market operations, a separate monetary-policy tool from the Board's own regulation-writing.

Unit: SIE outline 1.3.1

Question 3Exam level

The FOMC buys U.S. government securities in the open market. Which sequence follows?

How sure are you?

Correct: A. Paying for the securities credits the selling banks' reserve accounts, so reserves rise, banks lend the surplus, and short-term rates fall.
B. That is the chain for a Fed sale, not a purchase.
C. Keeps the reserve step but reverses the rate; more lendable reserves cannot push borrowing costs up.
D. A purchase adds reserves rather than draining them, contradicting the stem's own action.

Unit: SIE outline 1.3.1

Question 4Exam level

Congress passes legislation cutting federal income tax rates to stimulate demand. This action is:

How sure are you?

Correct: B. Taxation is a fiscal instrument, enacted by Congress and administered by the Treasury.
A. The Federal Reserve holds no taxing power; its levers reach money and credit, not tax law.
C. An open market operation is the Fed's trading desk buying or selling government securities, which no tax bill involves.
D. A reserve requirement is a ratio the Board of Governors sets on bank deposits, not tax law.

Unit: SIE outline 1.3.1

Question 5Exam level

The Federal Reserve sells government securities in the open market. What happens to the prices of bonds already outstanding?

How sure are you?

Correct: B. A Fed sale drains reserves, contracts the money supply and pushes rates up; a bond paying an older, lower coupon is worth less once new bonds pay more.
A. Rates rise on a sale, not fall.
C. Outstanding bonds reprice continuously in the secondary market; that repricing is the mechanism itself.
D. A sale removes reserves, so the money supply contracts, not expands.

Unit: SIE outline 1.3.1

Question 6Exam level

Which of these rates does the Federal Reserve both set and charge directly?

How sure are you?

Correct: A. The discount rate is set by the Board of Governors and charged directly to banks borrowing at the discount window.
B. The federal funds rate is set between banks; the FOMC only targets a range for it.
C. The prime rate is set by each commercial bank for itself.
D. The discount rate is a direct exception; the Fed both sets and charges it.

Unit: SIE outline 1.3.1

Question 7Exam level

What is the reserve requirement?

How sure are you?

Correct: B. The reserve requirement is the fraction of deposits a bank must hold back rather than lend, set by the Board of Governors.
A. That describes the discount rate, a different tool entirely.
C. That describes the federal funds rate.
D. Congress plays no role in setting it; the Board of Governors does, and it is not a savings-account rate.

Unit: SIE outline 1.3.1

Question 8Harder

Major banks raise their prime lending rate right after the Federal Reserve raises its target range for the federal funds rate. Did the Federal Reserve set the new prime rate?

How sure are you?

Correct: B. Each bank sets its own prime rate for its most creditworthy corporate customers; it tends to move with the federal funds rate because a bank's own cost of funds does, but tracking is not setting.
A. Prime is not defined as equal to the target range; it is each bank's own published number.
C. The discount rate is a separate, Fed-set rate charged at the discount window; prime is not another name for it.
D. Congress plays no role in setting the prime rate; commercial banks set their own.

Unit: SIE outline 1.3.1

Question 9Harder

The Federal Reserve wants the federal funds rate to fall. What does it actually do?

How sure are you?

Correct: B. The federal funds rate is a market rate; the FOMC sets a target range and steers the market toward it, mainly through open market operations.
A. The Fed does not decree the federal funds rate; it is set in the market between banks.
C. Raising the discount rate would push borrowing costs up, the opposite direction from the stated goal, and it is a separate tool from targeting fed funds.
D. No legislation is involved; this is entirely within the Fed's own monetary tools.

Unit: SIE outline 1.3.1

Question 10Harder

The Board of Governors raises the reserve requirement. What happens to banks' lending capacity and to money conditions?

How sure are you?

Correct: B. A higher reserve requirement forces banks to hold back more of each deposit, leaving less to lend, which tightens money.
A. Reverses the direction; raising the requirement reduces lending capacity, it does not increase it.
C. The reserve requirement directly limits how much of each deposit a bank may lend, so it has a direct effect.
D. Gets lending capacity right but mislabels the result; less lending capacity is tight money, not easy money.

Unit: SIE outline 1.3.1

Question 11Above the exam

The FOMC instructs its trading desk to sell government securities, and coverage of the meeting calls this a "restrictive" move. Which statement correctly ties the chain to that label?

How sure are you?

Correct: B. Selling runs the chain in the tightening direction end to end: reserves drain, the money supply contracts, short-term rates rise, and bond prices fall. That whole chain is what "restrictive" or "tight" money means.
A. Reverses the labels; selling securities is the tightening action, not the easing one.
C. "Restrictive" and "tight" describe the direction of either lever; the Fed's own selling action is properly described as restrictive.
D. Invents a dependency on Congress that the chain does not need; the Fed's own action is sufficient to justify the label on its own.

Unit: SIE outline 1.3.1

Question 12Above the exam

A report says "the Federal Reserve cut rates today." Two days later, a separate report says "Congress passed a bill increasing federal spending on infrastructure to boost growth." Are both of these the same kind of policy?

How sure are you?

Correct: B. "The Fed cut rates" is monetary policy, the Federal Reserve's own lever; "Congress passed a spending bill" is fiscal policy, Congress and the Treasury's lever. Sharing the goal of boosting the economy does not make them the same lever.
A. Collapses two different owners into one because both actions share a similar economic goal.
C. Wrongly assigns the Fed's own rate action to Congress.
D. Reverses both assignments; the Fed's action is monetary, Congress's is fiscal.

Unit: SIE outline 1.3.1