The Federal Reserve and its tools

Grade 12 Social Studies Worksheet - Challenge Me

Circle the best answer.

1. Read this first

   Federal funds target range after each cut, 2019 to 2020

   Month it took effect	Cut (percentage points)	New target range (percent)
   August 2019	0.25	2.00 to 2.25
   September 2019	0.25	1.75 to 2.00
   October 2019	0.25	1.50 to 1.75
   March 2020 (first cut)	0.50	1.00 to 1.25
   March 2020 (second cut)	1.00	0.00 to 0.25

   Note: Federal funds target range, upper and lower limits, from FRED (series DFEDTARL and DFEDTARU), retrieved Nov 14, 2026. Months are when each cut took effect. Before August 2019 the range had been 2.25 to 2.50 percent. Card B: The FOMC holds eight scheduled meetings a year. Card C (in our words): Changes in the target range work through spending, jobs and prices with a delay of months or longer, and the delay varies.

2. 1.

   Pia summarizes the path of the range from August 2019 to March 2020. Which statement is best supported by the chart?

   • Most cuts were 0.25 points, so the pace of easing was steady through the whole period on the chart
   • Five cuts in eight months took 2.25 points off: three of 0.25 in 2019, then 0.50 and 1.00
   • The range fell 2.50 points in total, since it began at a range topped by 2.50 percent and ended near zero
   • Cuts grew smaller after October 2019, so the range had stopped falling by the end of the period
3. 2.

   Card B says there are eight FOMC meetings a year. Bo counts the 2019 rows. Which statement fits the chart and card B?

   • In 2019 the range was cut at 8 of 8 meetings, and the chart then lists two more cuts in 2020
   • In 2019 the range was cut at 5 of 8 meetings, and the chart lists no cuts in 2020
   • In 2019 the range was cut at 3 of 8 meetings; the chart then lists two more cuts in March 2020
   • In 2019 the range was cut at 3 of 5 meetings, the 5 on the chart, and then twice more in 2020
4. 3.

   In November 2019 a commentator says the three cuts did nothing, since growth has not picked up yet. Esme tests that with card C. What is the best reading?

   • The claim cannot be tested, because growth is measured in percent and the range in percentage points
   • The claim is wrong: the cuts must be working, since the range had already fallen by 0.75 points
   • Too early to say: effects arrive with a delay that varies, so a few months cannot settle it
   • The claim is right: three cuts should already have lifted growth by the time of a November check
5. 4.

   A headline says the Fed 'cut rates by 80 percent' in March 2020. Jun checks the chart. Which statement describes the second cut best?

   • The headline is wrong, because the cut was just 1.00, which is small next to the old 1.25 limit
   • The upper limit fell 80 percent (1.25 to 0.25), a cut of 1.00 percentage point
   • The cut was 80 percentage points, since 80 percent of the rate is the same as 80 points
   • The upper limit fell 100 percent, since the lower limit went to zero and the range was wiped out
6. 5.

   The August and October 2019 cuts were both 0.25 points. Kira compares them as percent changes of the upper limit. Which statement is correct?

   • Equal in each way that matters, since both were 0.25 percentage points and so the same size as each other
   • Equal in points, but October was a larger percent: 12.5 percent of 2.00 against 10 percent of 2.50
   • August was 25 percent and October 25 percent, because 0.25 is a quarter of a point in both of them
   • August was the larger percent move, because the upper limit was higher at the start of the cuts than in October

7. Borrowing in Dorrin at each interest rate (made up)

   Interest rate (percent)	Dollars borrowed (millions)
   4	106
   5	100
   6	92
   7	83
   8	72

   Note: Dorrin is a made-up town. Card A: The table shows the dollars borrowed from banks each year, in millions, at each interest rate; the rate is the price of a loan. Card B: Midpoint rule for elasticity: percent change in quantity = change divided by the average of the two quantities; percent change in price the same way; elasticity = percent change in quantity divided by percent change in price, ignoring sign. Card C: Interest income for banks = the rate times the dollars borrowed. Card D: The town's policymaker wants borrowing cut from 100 to about 85 million.

8. 6.

   Milo finds the elasticity of borrowing between 5 and 6 percent using card B's midpoint rule. Which statement is correct?

   • About 0.46: borrowing falls 8.3 percent when the rate rises 18.2 percent, so it is not very responsive
   • Elastic, because borrowing fell when the rate rose, which is how a loan market works
   • About 2.2: the rate rose 18.2 percent and borrowing fell 8.3, so the rate is the more responsive
   • About 8: borrowing fell by 8 million for a one-point rise in the rate
9. 7.

   Card D wants borrowing cut to about 85 million. A policymaker proposes a one-point rise, from 5 to 6 percent. Does it meet the goal, Noah asks?

   • Yes: a rise from 5 to 6 is a 20 percent rise in the rate, so borrowing falls 20 percent
   • Yes: the first point of increase cut 6 million, so a second would cut the same
   • No: borrowing falls only to 92; the table suggests about 7 percent, where it is 83
   • No: borrowing does not fall below 92, so no rate on the table can meet the goal
10. 8.

    Ren compares the 5-to-6 move with the 7-to-8 move using card B. Which statement is best supported?

    • The responses are equal, because borrowing falls by about 10 million per point in each range
    • Borrowing responds more at higher rates: about 0.46 from 5 to 6 but about 1.06 from 7 to 8
    • Borrowing responds less at higher rates, because each added point of rate cuts fewer dollars
    • Borrowing responds more at 5 to 6, because it is a bigger percent rise in the rate (18 percent)
11. 9.

    Using card C, Tala tracks the bank's interest income as the rate rises from 5 to 8 percent. Which statement fits the table?

    • It falls from the start, because borrowing falls at each step up in the rate
    • It keeps rising to 8 percent, because each higher rate earns more on the loans made
    • It rises to 5.81 million at 7 percent, then dips to 5.76 million at 8
    • It peaks at 6 percent, where the rate rise and the borrowing fall are about equal
12. 10.

    A banker says a higher rate always means more income. Zee tests that with card C. Which reply is strongest?

    • Not above 7 percent: income falls to $5.76 million at 8 from $5.81 at 7, as borrowing falls faster
    • The banker is wrong at each rate, since higher rates cut borrowing by enough to lower income
    • The banker is right, since the rate rose 14 percent at the same time as borrowing fell 13
    • The banker is right, because 8 percent earns $0.76 million more than 5 percent does at the same loans