Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does the discount rate directly impact?

1. Consumer savings accounts

2. Short-term interest rates

3. Investment in corporate bonds

4. Equity market performance

The correct answer is: Short-term interest rates

The discount rate is the interest rate set by central banks, such as the Federal Reserve in the United States, for lending funds to commercial banks. It has a direct impact on short-term interest rates because when the discount rate changes, it influences the cost of borrowing for banks. In turn, banks adjust their own interest rates for loans and deposits in response to changes in the cost of obtaining funds from the central bank. When the discount rate is lowered, it becomes cheaper for banks to borrow money, encouraging them to lend more, which can lower interest rates for consumers and businesses. Conversely, if the discount rate is increased, the cost of borrowing rises, leading banks to raise the interest rates they charge customers. This chain reaction influences various short-term financial products, such as personal loans, mortgages, and credit card rates, making it a key factor in shaping the overall monetary environment and economic activity.