Certified Financial Management Specialist Practice Exam

Which function does the Federal Reserve primarily perform regarding interest rates?

1. Guaranteeing stability in the stock market

2. Setting limits on corporate incomes

3. Lowers interest rates to stimulate economic activity

4. Regulating individual banking loans

The correct answer is: Lowers interest rates to stimulate economic activity

The Federal Reserve primarily performs the function of lowering interest rates to stimulate economic activity. This action is part of its monetary policy strategy aimed at managing economic growth and controlling inflation. When the Federal Reserve reduces interest rates, it makes borrowing cheaper, encouraging both consumers and businesses to take loans for spending and investments. This increased demand can lead to economic expansion, job creation, and improved overall economic conditions. The rationale behind this function lies in the broader objectives of the Federal Reserve, which include promoting maximum employment, stabilizing prices, and moderating long-term interest rates. By adjusting the federal funds rate, the primary tool for influencing interest rates, the Federal Reserve can effectively control the money supply and stimulate or slow down economic growth as required. Other options presented do not align with the primary objectives and functions of the Federal Reserve. Guaranteeing stability in the stock market is not a direct function, as stock market dynamics are influenced by various factors beyond Fed policies. Setting limits on corporate incomes doesn't fall under the Fed's responsibilities, which are more focused on monetary policy rather than regulatory limits on businesses. Regulating individual banking loans is the responsibility of different financial regulatory bodies, although the Fed sets the framework within which banks operate.