Massachusetts Real Estate License Practice Test

What is the name of the rate charged by the Federal Reserve Board to its member banks to encourage increased economic activity?

1. Discount Rate

2. Interest Rate

3. Margin Rate

4. Inflation Rate

The correct answer is: Discount Rate

The correct term for the rate charged by the Federal Reserve Board to its member banks is the Discount Rate. This rate serves an important function in the economy, acting as a tool for the Federal Reserve to influence monetary policy. When the Federal Reserve lowers the discount rate, it encourages banks to borrow more, which in turn increases the money supply and can stimulate economic activity. Conversely, a higher discount rate makes borrowing more expensive, which may reduce the amount of money circulating in the economy. Understanding this mechanism is crucial for those studying real estate, as changes in the discount rate can affect interest rates, borrowing costs, and ultimately the housing market. The other terms—Interest Rate, Margin Rate, and Inflation Rate—refer to different financial concepts and do not specifically involve the actions of the Federal Reserve concerning member banks. The Interest Rate can be influenced by the discount rate, but it is not the rate charged directly by the Fed. Margin Rate relates to the amount borrowed for investments, while Inflation Rate measures the increase in prices over time and does not directly pertain to bank borrowing costs.