1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability Flashcards
When the Federal Reserve increases the federal funds rate, what is the likely immediate impact on the stock market?
A. Increase in stock prices
B. Decrease in stock prices
C. No change in stock prices
D. Increase in bond yields
B. Decrease in stock prices
Explanation: Increasing the federal funds rate makes borrowing more expensive, potentially slowing economic growth and reducing corporate profits, which can lead to a decrease in stock prices.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
The Federal Reserve decides to decrease interest rates in response to a looming recession. What is this policy action likely to encourage?
A. Increased saving
B. Decreased investment
C. Increased borrowing and spending
D. Decreased consumer confidence
C. Increased borrowing and spending
Explanation: Lower interest rates reduce the cost of borrowing, encouraging businesses and consumers to increase spending and investment to stimulate the economy.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
If the Federal Reserve is concerned about inflation, which of the following actions is it most likely to take?
A. Lower the discount rate
B. Buy government securities
C. Increase the reserve requirement
D. Decrease the federal funds target rate
C. Increase the reserve requirement
Explanation: Increasing the reserve requirement reduces the amount of money banks can lend, thereby slowing the money supply growth and helping to control inflation.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
Which Federal Reserve action can lead directly to an increase in consumer spending?
A. Raising the federal funds rate
B. Selling Treasury securities
C. Lowering the discount rate
D. Increasing the reserve requirements
C. Lowering the discount rate
Explanation: Lowering the discount rate decreases the cost for banks to borrow money from the Fed, which can lead to lower interest rates for consumers and higher spending.
*
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability*
During a period of high unemployment, the Federal Reserve is likely to:
A. Increase the federal funds rate
B. Decrease the reserve requirement
C. Sell government bonds
D. Raise interest rates
B. Decrease the reserve requirement
Explanation: Lowering the reserve requirement allows banks to lend more, which can stimulate investment and spending, potentially leading to job creation.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
What is a likely effect of the Federal Reserve engaging in open market operations to purchase U.S. Treasury securities?
A. Increased interest rates
B. Decreased interest rates
C. Unchanged unemployment rates
D. Increased inflation only
B. Decreased interest rates
Explanation: Purchasing Treasury securities increases the money supply and lowers interest rates, stimulating economic growth.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
How does an increase in the federal funds rate by the Federal Reserve impact the value of the U.S. dollar in the foreign exchange markets?
A. The value increases
B. The value decreases
C. The value does not change
D. The effect on the value cannot be determined
A. The value increases
Explanation: Higher interest rates offer higher returns on investments denominated in that currency, making the U.S. dollar more attractive to foreign investors, thus increasing its value.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
What might be the long-term economic impact of maintaining a low federal funds rate for an extended period?
A. Stimulation of sustainable long-term economic growth
B. Prevention of any future economic recessions
C. Potential for inflationary pressures
D. Decrease in the national debt
C. Potential for inflationary pressures
Explanation: Keeping interest rates low for too long can lead to excessive borrowing and spending, which may fuel inflation over time.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
If the Federal Reserve announces a sudden increase in the reserve requirement, what is the likely immediate reaction in the bond market?
A. Increase in bond prices
B. Decrease in bond prices
C. No change in bond prices
D. Increase in bond yields
B. Decrease in bond prices
**Explanation: **Increasing the reserve requirement reduces the money supply, potentially leading to higher interest rates, which usually causes bond prices to fall (as yields rise).
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
The Federal Reserve opts to use quantitative easing during a period of slow economic growth. What is the primary goal of this action?
A) To decrease liquidity in the banking system
B) To increase liquidity and stimulate borrowing and spending
C) To stabilize stock market prices
D) To directly lower unemployment rates
B To increase liquidity and stimulate borrowing and spending
Explanation: Quantitative easing involves the Fed buying long-term securities to increase the money supply and lower interest rates, thereby stimulating economic activity.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
What is the most direct effect of the Federal Reserve increasing the discount rate?
A. It makes it cheaper for banks to borrow money from the Fed
B. It makes it more expensive for banks to borrow money from the Fed
C. It increases the federal funds rate automatically
D. It decreases consumer interest rates
B. It makes it more expensive for banks to borrow money from the Fed
**Explanation: **The discount rate is the interest rate the Fed charges on loans it provides to financial institutions. Raising this rate makes borrowing from the Fed more expensive for banks.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
In response to a potential overheating of the economy, what might the Federal Reserve do?
A. Decrease the federal funds rate
B. Increase the reserve requirement and raise interest rates
C. Purchase additional government securities
D. Decrease the discount rate
B. Increase the reserve requirement and raise interest rates
Explanation: These actions are designed to reduce the money supply and increase borrowing costs, helping to cool off economic activity and control inflation.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
A business owner observes that the Federal Reserve has just lowered interest rates. What should the business owner expect in terms of bank loans?
A. Loans to become more expensive
B. Loans to become less expensive
C. No change in the cost of loans
D. Immediate increase in business taxes
B. Loans to become less expensive
Explanation: Lower interest rates generally lead to lower borrowing costs, making it cheaper for businesses to obtain loans.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
If the Federal Reserve is pursuing a policy of tightening, which of the following is a likely consequence?
A. Decreased mortgage rates
B. Increased consumer spending
C. Slowed economic growth
D. Decreased savings rates
C. Slowed economic growth
Explanation: Tightening, or raising interest rates, typically slows borrowing and spending, which can lead to slower economic growth.
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability
The Federal Reserve observes rising prices and decides to act. Which policy would most effectively combat inflation?
A. Reducing the federal funds rate
B. Increasing the federal funds rate
C. Buying more government securities
D. Eliminating reserve requirements
B. Increasing the federal funds rate
Explanation: Raising the federal funds rate increases borrowing costs, which can help cool economic activity and control inflation.
*
1.3.1 The Federal Reserve Board’s Impact on Business Activity and Market Stability*
