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

Which rate is charged by the Federal Reserve to member banks?

1. Prime rate

2. Discount rate

3. Fed funds rate

4. T-bill rate

The correct answer is: Discount rate

The correct answer is the discount rate, which is the interest rate charged by the Federal Reserve to member banks for short-term loans. This rate is a key tool used by the Federal Reserve to influence monetary policy and manage the economy. By adjusting the discount rate, the Fed can either encourage or discourage borrowing by banks, which in turn affects the availability of credit in the economy. When the discount rate is lowered, it becomes cheaper for banks to borrow money, which can stimulate lending to businesses and consumers, ultimately spurring economic growth. Conversely, raising the discount rate makes borrowing more expensive, which can help to cool off an overheated economy or control inflation. The other rates mentioned, like the prime rate, reflect the interest that banks charge their best customers and are influenced by the discount rate but are not directly set by the Federal Reserve. The federal funds rate is the interest rate at which banks lend to each other overnight and is also influenced by the Fed's monetary policy but is not the rate charged directly by the Federal Reserve to member banks. T-bill rates pertain to Treasury bills and represent the return on short-term government debt securities, which are unrelated to the lending practices of the Federal Reserve.