SIE Unit 13
Currency held by the public, including checking accounts and time deposits less than $100,000, and money market mutual funds would best be described by economists as A) M2. B) M1. C) M4. D) M3.
A. M2 M2 is M1 (currency held by the public including checking accounts) plus time deposits less than $100,000 and money market mutual funds.
M1 is a measure of the value of A) cash and funds held in DDAs. B) cash, cash equivalents, and DDAs. C) M2 plus retail CDs and money markets. D) retail CDs and money markets.
A. cash and funds held in DDAs M1 is the tightest of the money supply measures, including only actual cash in circulation and funds in demand deposit accounts (DDAs) (e.g., checking and savings accounts).
Which of these is not a tool used by the Federal Reserve Board (FRB) to impact the money supply? A) Changing the prime rate B) Open market operations of the FOMC C) Changing the discount rate D) Changing the reserve requirements
A. changing the prime rate The prime rate is set by money-center banks, not the FRB. The remaining answer choices are the tools available to the FRB, which affects the money supply.
Within the money supply, which of the following are part of M2 but not M1? A) Demand deposits at S&Ls B) Money market mutual funds C) Checking accounts at commercial banks D) Currency in circulation
B. money market mutual funds Money market funds are part of M2 but not M1. M2 includes everything in M1, plus time deposits and money market funds.
The Federal Reserve Board (FRB) might impact the money supply by using all of the following except A) reserve requirements for member banks. B) prime rate. C) buying or selling securities in open market. D) discount rate
B. prime rate The prime rate is set by money center banks, not the FRB. The remaining three answer choices are the tools available to the FRB to be used to impact the money supply.
The interest rate negotiated for an uncollateralized overnight loan between two money center banks is known as A) the repo rate. B) the discount rate. C) the prime rate. D) the federal funds rate.
D the federal funds rate The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured (no collateral) loan.
Large time deposits of more than $100,000 are considered to be found in what part of the money supply? A) M1 B) M1 and M2 C) M2 D) M3
D. M3 M3 is where time deposits of more than $100,000 and repurchase agreements with terms longer than one day are found.
When engaging in open-market operations, taking actions to either expand or contract the money supply, the Federal Reserve Board (FRB) will buy or sell A) corporate bonds. B) U.S government agency securities. C) corporate equity securities. D) Treasury securities.
D. Treasury securities The FRB will buy or sell Treasury securities in the open market to either expand or contract the money supply.
To prevent inflation by tightening the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) raise the discount rate. B) sell U.S. government securities in open-market operations. C) raise the reserve requirement. D) lower the prime rate.
D. lower the prime rate To slow the economy in an attempt to prevent inflation by tightening the availability of credit (less money available, which raises interest rates), the FRB can sell U.S. government securities in open-market operations, raise the discount rate, and raise the reserve requirement. The prime rate is set by banks not the FRB.
Which of the following has the greatest influence on the money supply within the United States? A) The Depository Trust Corporation (DTC) B) The Internal Revenue Service (IRS) C) The Securities Exchange Commission (SEC) D) The Federal Open Market Committee (FOMC)
D. the Federal Open Market Committee (FOMC) The Federal Reserve Board (FRB) influences the money supply by buying and selling U.S. government securities in the open market which expand or contract the money supply. The Federal Open Market Committee (FOMC) consists of the Board of Governors of the Federal Reserve System and several Reserve Bank presidents. The committee meets regularly to direct the government's open-market operations. For example, when the FOMC directs the purchase of securities, it increases the supply of money in the banking system, and when it sells securities, it decreases the supply.
Seacoast Securities, a FINRA member firm and a large corporation, needs to secure funds to cover customers' margin purchases. Seacoast reaches an agreement to borrow from a large money-center bank for a loan that the bank can terminate with 24 hours' notice. The rate that the bank charges Seacoast for this loans is called A) the prime rate. B) the federal funds rate. C) the discount rate. D) the broker call loan rate.
D. the broker loan rate A broker-dealer borrows funds to use in margin purchases at the broker call loan rate, and these loans may be called with a one-day notice. The use of the funds classifies this as a broker call loan. Seacoast may borrow for other purposes at the prime rate, but not for this activity.
The broker loan rate charged by banks is also known as A) federal funds rate. B) discount rate. C) prime rate. D) the call loan rate.
D. the call loan rate The broker loan rate or call loan rate is the interest rate banks charge broker-dealers on money that broker-dealers borrow to lend to margin account customers.
It is generally agreed upon that the most volatile interest rate in the U.S. economy is A) the discount rate. B) the prime rate. C) the call money rate. D) the federal funds rate.
D. the federal funds rate The federal funds rate is the rate the commercial-money-center banks charge each other for overnight loans of $1 million or more. It is considered a barometer of the direction of short-term interest rates, which fluctuate constantly. Therefore, the federal funds rate can be considered the most volatile rate in the economy.
To arrive at M3, one would add to M2 which of the following? A) $100,000 and larger time deposits and repurchase agreements B) Gold and silver bars held on reserve at the FR C) All currency in circulation, including coins D) Savings and checking accounts
A. $100,000 and largest time deposits and repurchase agreements Included in M3 but not found in M2 are time deposits of more than $100,000 and repurchase agreements with terms longer than one day.
When a bank lends money to a broker-dealer for the purpose of lending to margin account customers, the bank is lending at which of the following rates? A) Broker call loan B) Discount C) Federal funds D) Prime
A. Broker call loan Money lent to broker-dealers by banks for the purpose of making loans to margin account customers, the money is borrowed at the broker call loan rate (broker loan rate or call rate).
Where can demand deposits, checking accounts, paper currency and coins be found in the money supply? A) M1, M2, and M3 B) M2 only C) M1 and M3 only D) M1 only
A. M1, M2, and M3 Demand deposits, checking accounts, paper currency, and coins are a part of M1 in the money supply. However, consider that M2 contains all of M1, and M3 contains all of M2 and M1; therefore, one should recognize that these components are found in each of them: M1, M2, and M3,
For those who follow monetary theory, which is the most complete measure of the money supply? A) M3 B) M1 + M2 C) M1 D) M2
A. M3 M3 is the most complete of the money supply measures because it includes all of M1 and M2 and adds large time deposits (only those over $100,000) plus repurchase agreements (repos) with a term of more than one day.
According to economists which of the following is the correct characterization of the money supply? A) M3 includes all of M1 and M2. B) M1 includes all of M2 and M3. C) M2 equals M1 plus M3. D) M1 plus M2 equals M3.
A. M3 includes all of M1 and M2 M3 includes all of M1 and M2, plus time deposits of more than $100,000 and repurchase agreements with terms longer than one day. In this light, M3 is that measure of the money supply that is the most inclusive.
When a bank lends money to a broker-dealer for the purpose of lending to margin account customers, the bank is lending at which of the following rates? A) Broker call loan B) Prime C) Discount D) Federal funds
A. broker call loan Money lent to broker-dealers by banks for the purpose of making loans to margin account customers, the money is borrowed at the broker call loan rate (broker loan rate or call rate).
Which of the following benchmark interest rates is considered a barometer of the direction of short-term interest rates? A) Federal funds rate B) Prime rate C) Discount rate D) Broker call loan rate
A. federal funds rate The federal funds rate is the rate that commercial money center banks charge each other for overnight loans of $1 million or more. Overnight, representing the shortest of loans, makes this rate a good indicator of the direction short-term interest rates are taking.
When the money supply in the economy decreases, A) interest rates go up, hence borrowing and spending for consumers is more difficult. B) interest rates go down, hence borrowing and spending for consumers is easier. C) interest rates go down, hence borrowing and spending for consumers is more difficult. D) interest rates go up, hence borrowing and spending for consumers is easier.
A. interest rates go up, hence borrowing and spending for consumers is more difficult Decreases in the money supply means less money is available to lend. This pushes interest rates up, hence borrowing and spending for consumers is more difficult.
When the demand for money exceeds the supply, A) interest rates rise, making consumer borrowing more difficult. B) interest rates fall, making consumer borrowing easier. C) interest rates rise, making consumer borrowing easier. D) interest rates fall, making consumer borrowing more difficult.
A. interest rates rise, making consumer borrowing more difficult Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the demand for money exceeds the supply, interest rates rise, making consumer borrowing more difficult.
To ease its monetary policy, allowing consumers to borrow more easily, the Federal Reserve Board (FRB) can A) lower the discount rate. B) raise the discount rate. C) raise the federal funds rate. D) lower the federal funds rate.
A. lower the discount rate Wanting to ease its monetary policy, which would allow consumers to borrow more easily, the FRB can lower the discount rate—the rate it charges its member banks for short-term loans. This frees up more money for its member banks to lend to consumers. The federal funds rate isn't one charged by the FRB but instead by large commercial banks to one another.
Under the dual mandate, the Federal Reserve is most concerned with achieving A) maximum employment and controlling inflation. B) minimum unemployment and maximum money supply. C) federal spending and debt. D) maximum employment and managing taxation.
A. maximum employment and controlling inflation The dual mandate is designed to give this independent government agency two goals: maintain a healthy economy that supplies jobs enough for job seekers and keep prices from fluctuating aggressively. Some inflation is considered healthy. The Federal Reserve has inflation and unemployment targets.
Which of the following interest rates do large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans? A) Prime rate B) Discount rate C) Federal funds rate D) Broker call loan rate
A. prime rate Each bank sets its own prime rate—the rate charged to their most credit worthy corporate customers for unsecured loans.
Money available to lend to corporations and consumers is impacted most in the United States by the policies of which of the following? A) The Federal Open Market Committee (FOMC) B) The Internal Revenue Service (IRS) C) The National Securities Clearing Corporation (NSCC) D) The Securities and Exchange Commission (SEC)
A. the Federal Open Market Committee (FOMC) The FOMC meets regularly to direct the Federal Reserve Board (FRB) to either buy or sell Treasury securities in the open market. Purchases add money to the economy, making the money available to lend more plentiful, and sales take money out of the economy, making money available to lend less plentiful.
Which benchmark interest rate indicates the direction of the Federal Reserve Board's monetary policy? A) The discount rate B) The broker call loan rate C) The prime rate D) The federal funds rate
A. the discount rate The discount rate, being the rate the Federal Reserve Bank (FRB) charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers
The rate that commercial money center banks charge each other for overnight loans is A) the federal funds rate. B) the prime rate. C) the broker call loan rate. D) the discount rate.
A. the federal funds rate The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more.
When the Federal Reserve Board (FRB) utilizes the tools available to it, it is influencing A) the money supply. B) the amount of money raised through taxes. C) the federal budget. D) fiscal policies.
A. the money supply Through the use of open-market operations, affecting changes in the discount rate, and setting reserve requirements, the FRB is influencing the money supply. The money supply is the capital available for lending institutions to lend and thus consumers to borrow and spend.
The Federal Reserve's dual mandate includes which of these? 1. Maintaining maximum employment 2. Enforcement of price controls 3. Control the value of the dollar versus other currencies 4. Price stability A) 1 and 2 B) 1 and 4 C) 2 and 3 D) 3 and 4
B. 1 and 4 The dual mandate is to maintain maximum employment while keeping inflation in check (price stability). They do not enforce price controls. They may takes steps to manage the value of the dollar, but this is not a part of the dual mandate.
Which of these does M2 measure? 1. M1 2. M3 3. Term repos and jumbo CDs 4. Retail CDs and money markets A) 2 and 4 B) 1 and 4 C) 1 and 3 D) 2 and 3
B. 1 and 4 M1 is a component of M2 and adds retail CDs and money markets. M2 is a component of M3, plus term repos and jumbo CDs.
All currency held by the public, including coins, checking accounts plus time deposits of less than $100,000, and money market mutual funds, is what economists define as A) the money supply. B) M2. C) M1. D) M3.
B. M2 M2 equals all of M1 (currency held by the public including coins and checking accounts) plus time deposits less than $100,000 and money market mutual funds.
Tools available to the Federal Reserve Board (FRB) include A) setting the Fed funds rate, setting the prime rate, and setting the discount rate. B) open-market operations, setting the discount rate, and setting reserve requirements. C) setting the discount rate, enacting tax laws, and setting the Fed funds rate. D) open-market operations, setting the discount rate, and enacting tax laws.
B. Open-market operations, setting the discount rate, and setting reserve requirements While engaging in monetary policy to impact the money supply, the FRB has three tools: open-market operations, setting the discount rate, and setting reserve requirements. Tax laws are fiscal policy, and neither the prime rate nor the Fed funds rate is set by the FRB.
A registered representative has a customer buying securities, but rather than paying in full, the customer wants to borrow some of the money needed for the purchase from the broker-dealer. It is explained to the customer that in order to borrow the money, there will be interest payable based on A) the discount rate. B) the broker call loan rate. C) the prime rate. D) the federal funds rate.
B. broker call loan rate The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to relend to margin account customers.
The prime rate is set by A) the Federal Reserve Board (FRB). B) individual banks. C) the Securities and Exchange Commission (SEC). D) the Federal Open Market Committee (FOMC).
B. individual banks The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own prime rate.
When the supply for money exceeds the demand, A) interest rates rise, making consumer borrowing more difficult. B) interest rates fall, making consumer borrowing easier. C) interest rates rise, making consumer borrowing easier. D) interest rates fall, making consumer borrowing more difficult.
B. interest rates fall, making consumer borrowing easier Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the supply is greater than the demand for money, interest rates fall, making consumer borrowing easier.
When the money supply in the economy increases, A) interest rates go down, hence borrowing and spending for consumers is more difficult. B) interest rates go down, hence borrowing and spending for consumers is easier. C) interest rates go up, hence borrowing and spending for consumers is more difficult. D) interest rates go up, hence borrowing and spending for consumers is easier.
B. interest rates go down, hence borrowing and spending for consumers is easy Increases in the money supply means more money is available to lend. This pushes interest rates down, hence borrowing and spending for consumers is easier.
To prevent inflation by tightening the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) sell U.S. government securities in open-market operations. B) lower the prime rate. C) raise the reserve requirement. D) raise the discount rate.
B. lower the prime rate To slow the economy in an attempt to prevent inflation by tightening the availability of credit (less money available, which raises interest rates), the FRB can sell U.S. government securities in open-market operations, raise the discount rate, and raise the reserve requirement. The prime rate is set by banks not the FRB.
The Federal Reserve pursues its dual mandate through A) fiscal policy. B) monetary policy. C) economic policy. D) trade policy.
B. monetary policy The Federal Reserve is tasked with using monetary policy to manage the economy. Fiscal policy—taxation and spending—is managed by the legislative and the executive branch. Trade policy is driven primarily by the executive branch, and all of this is part of economic policy.
To stimulate the economy during a recession by expanding the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) buy U.S. government securities in open-market operations. B) raise the federal funds rate. C) lower the reserve requirement. D) lower the discount rate.
B. raise federal funds rate To stimulate the economy by expanding the availability of credit (more money available, which lowers interest rates), the FRB can buy U.S. government securities in open-market operations, lower the discount rate, and lower the reserve requirement. The federal funds rate is not set by the FRB.
Of the standard Federal Reserve tools, which of these is considered the most powerful and used infrequently? A) Discount rate B) Reserve rate C) Quantitative easing D) FOMC activities
B. reserve rate The reserve rate (i.e., the amount member banks keep on deposit at the Federal Reserve for liquidity) has the most dramatic impact when changed. It is rarely changed.
To contract the overall economy, the Federal Reserve Board (FRB), acting as agent for the U.S. Treasury department, will A) buy securities via open-market operations, pushing interest rates up. B) sell securities via open-market operations, pushing interest rates up. C) sell securities via open-market operations, pushing interest rates down. D) buy securities via open-market operations, pushing interest rates down.
B. sell securities via open-market operations, pushing interest rates up To contract the overall economy, we want to push interest rates up by decreasing the money supply. Higher interest rates make borrowing and spending more difficult for consumers. To decrease the money supply, the Federal Reserve Board (FRB) will sell securities via open-market operations, putting securities into the banking system and taking money out of the banking system.
Federal Reserve member banks needing to borrow money can borrow from A) the Federal Reserve Bank at the federal funds rate. B) the Federal Reserve Bank at the discount rate. C) member firms at the discount rate. D) nonmember banks at the federal funds rate.
B. the Federal Reserve Bank at the discount rate Federal Reserve member banks needing to borrow have two resources: the Federal Reserve Bank itself, which will lend to them at the discount rate, and other member banks, who will lend to one another at the federal funds rate.
Certain actions taken by the Federal Reserve Board (FRB) would likely have the effect of causing interest rates to increase. Which would these be? 1. The Federal Open Market Committee (FOMC) buying securities 2. Raising the reserve requirements 3. Raising the discount rate 4. Raising the prime rate A) 2 and 4 B) 1 and 4 C) 2 and 3 D) 1 and 3
C. 2 and 3 Raising reserve requirements, having more member deposits being held on reserve at the Fed, would lessen the money available to lend. Raising the discount rate, charging member banks more for loans, would also lessen the money available to lend. With less money available to lend, interest rates would go up.
Which of the following would be associated with loans made to member banks of the Federal Reserve? A) Call loan rate B) Prime rate C) Discount rate D) Margin rate
C. Discount rate Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.
Which of the following would be the interest rate charged for overnight, uncollateralized loans negotiated between two money center banks? A) Repo rate B) Prime rate C) Federal funds rate D) Discount rate
C. Federal funds rate The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured loan. It is considered a barometer of the direction of short-term interest rates such as commercial paper and Treasury bills, which often move up or down roughly in parallel with the funds rate.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this will do which of the following? A) Have no impact on lending rates to consumers B) Loosen the money supply C) Increase interest rates on loans to consumers D) Decrease interest rates on loans to consumers
C. Increase interest rates on loans to customers When the FOMC directs that Treasury securities be sold in the open market, this will tighten the money supply; securities go into the economy, and money comes out of the economy. Less money available increases interest rates to consumers.
The monetarist theory proposes which of the following? A) The federal government impacts the economy through repurchase and reverse repurchase agreements. B) The federal government can impact the economy by raising and lowering the federal funds rate. C) The Federal Reserve may impact the economy by raising and lowering the discount rate. D) The Federal Reserve has a major impact on the economy by raising and lowering taxes.
C. The Federal Reserve may impact the economy by raising and lowering the discount rate The Federal Reserve controls the discount rate and repurchase and reverse repurchase agreements. The federal government controls taxes and spending.
Which of the following is the rate of interest charged by the Federal Reserve Bank (FRB) for short-term loans to its member banks? A) The broker call loan rate B) The prime rate C) The discount rate D) The federal funds rate
C. The discount rate The discount rate is the rate the Federal Reserve charges for short-term loans to member banks.
The best characterization of how economists view the money supply is A) paper money and coinage only. B) all forms of cash and liquid instruments but no forms of credit. C) cash, loans, different forms of credit, and other liquid instruments. D) savings and checking accounts and all lines of credit but not paper money or coins.
C. cash, loans, different forms of credit, and other liquid instruments Economists take a broad view of the money supply and include within it all cash (paper money and coins), loans, credit, and other liquid instruments, such as savings and checking accounts.
Considered the most volatile of the benchmark interest rates in the economy would be A) the prime rate. B) the broker call loan rate. C) the federal funds rate. D) the discount rate.
C. federal funds rate The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.
The Federal Reserve is concerned that the economy is slowing. With this in mind, which of these actions would the Federal Reserve most likely engage in? A) Engage in open market sales of T-bills B) Raise the margin requirements under Regulation T C) Pursue an easy-money policy to lower interest rates D) Double the reserve requirements for member banks
C. pursue an easy-money policy to lower interest rates Monetary policy is implemented by the FRB. Monetary policy attempts to control the supply of money to influence the level of interest rates which, in turn, will either stimulate or dampen the U.S. economy. If the FRB believes the economy is sluggish and needs to be stimulated, it will attempt to lower interest rates by pursuing an easy-money policy. Lower rates are designed to encourage borrowing in an effort to stimulate growth. Raising margin rates or reserve requirements is considered a tightening action, which will dampen economic activity. Selling T-bills will reduce the money supply and raise rates, which is also a tightening action.
Tighter credit will A) slow economic expansion, fueling inflation. B) stimulate the economy, preventing expansion. C) slow economic expansion, preventing inflation. D) stimulate the economy, fueling expansion.
C. slow economic expansion, preventing inflation Tighter credit means that there is less money available to lend to consumers. Less money available to lend means less consumer spending, which will slow economic growth, and helps prevent or slow inflation.
A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from A) another FRB member bank at the discount rate. B) the Federal Reserve Board (FRB) at the federal funds rate. C) the Federal Reserve Board (FRB) at the discount rate. D) another FRB member bank at the prime rate.
C. the Federal Reserve Board (FSB) at the discount rate A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.
A customer of a Financial Industry Regulatory Authority (FINRA) member firm buys securities on margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following? A) The federal funds rate B) The prime rate C) The broker call loan rate D) The discount rate
C. the broker call loan rate The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities without paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.
First Amalgamated Bank of Buffalo, a large commercial bank, is a member of the Federal Reserve System. Should the bank need to increase its reserves, it could do which of these? 1. Borrow from the FRB and pay the discount rate. 2. Borrow from the FRB and pay the federal funds rate. 3. Borrow from another member bank and pay the discount rate. 4. Borrow from another member bank and pay the federal funds rate. A) 2 and 4 B) 2 and 3 C) 1 and 3 D) 1 and 4
D. 1 and 4 When a bank needs to borrow money to increase its reserves, it can borrow from the Federal Reserve Bank or it can borrow from another member bank like itself. When borrowing from the FRB, the banks pay the discount rate. When borrowing from another member bank, the banks pay the federal funds rate.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this A) increases the supply of money. B) stabilizes the money supply. C) is intended to hinder contraction of the money supply. D) decreases the money supply.
D. decreases the money supply When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this decreases the supply of money. Treasury securities are going into the economy and, therefore, money is coming out—the money supply decreases.
The Federal Reserve sets which of these rates? A) Prime B) Broker call C) Federal funds D) Discount
D. discount Only the discount rate is set by the Fed. The others are set by the banks.
When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this A) decreases the money supply. B) is intended to hinder contraction of the money supply. C) stabilizes the money supply. D) increases the supply of money.
D. increases the supply of money When the FOMC directs that Treasury securities be purchased in the open market, this increases the supply of money. Treasury securities are coming out of the economy and, therefore, money is going in—the money supply increases.
A bank is likely to do which of the following when the Federal Reserve Board (FRB) eases the money supply? A) Raise its broker call loan rate B) Raise its prime rate C) Lower the hypothecation loan rate D) Lower its prime rate
D. lower its prime rate The prime rate and the broker call loan rate are set by banks for loans to corporate customers and broker-dealers, respectively. If the FRB eases the money supply (makes more money available to lend), banks can charge less for loans and will lower their lending rates. The hypothecation process isn't a rate, but a percentage amount (140% of the debit balance) and will not be impacted by the Fed's action with the money supply.
If large money center commercial banks begin to lower their prime rates, which of the following is most likely to occur? A) Smaller banks will follow by lowering the discount rate. B) Smaller banks will need to offset the lower prime rate by increasing the broker call loan rate. C) Smaller banks will need to increase their lending rates for creditworthy corporate customers. D) Smaller banks will lower lending rates for creditworthy corporate customers as well.
D. smaller banks will lower lending rates for creditworthy corporate customers as well When large money center commercial bank lower the prime rate, the rate charged to their most creditworthy corporate customers, smaller banks will generally follow in order to stay competitive. The discount rate is set by the Federal Reserve Board (FRB) (not banks), and if the broker call loan rate banks charge is impacted, it would also be lowered (not increased)
