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

Which interest rate is subject to daily fluctuations?

1. Prime rate

2. Discount rate

3. Fed funds rate

4. T-bill rate

The correct answer is: Fed funds rate

The Fed funds rate is the correct answer because it is the interest rate at which banks lend reserves to each other overnight. This rate is influenced by the monetary policy decisions made by the Federal Reserve and can change frequently, often on a daily basis. It is an essential tool for controlling the money supply and, consequently, inflation and economic activity. Since the Fed funds rate is determined by the supply and demand for reserves in the banking system, it can fluctuate significantly based on banks' daily needs for liquidity. As a result, it is much more sensitive to immediate economic conditions compared to other interest rates, which may be set at specific intervals or respond less dynamically to market conditions. The other rates mentioned, such as the prime rate and the discount rate, are generally more stable over time and change at a less frequent pace. The T-bill rate, while it does reflect changes in market conditions, is also influenced by longer-term factors and less instantaneously responsive compared to the Fed funds rate. Thus, while these other rates may have periodic adjustments, the Fed funds rate is unique in its daily volatility and responsiveness to immediate banking demands.