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
   • 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
   • Five cuts in eight months took 2.25 points off: three of 0.25 in 2019, then 0.50 and 1.00
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 5 of 8 meetings, and the chart lists no cuts in 2020
   • In 2019 the range was cut at 3 of 5 meetings, the 5 on the chart, and then twice more 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 8 of 8 meetings, and the chart then lists two more cuts in 2020
4. 3.

   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
5. 4.

   A student says the chart shows why the FOMC made its largest cut in March 2020. Luz tests the claim. What is the best verdict?

   • Shown: prices were rising slowly by then, so the large cut reflects low inflation at that time
   • Shown: the cut was large because the economy was weak, since larger cuts signal worry about jobs
   • Refuted: the cut before it, in the first March action, was 0.50, so the large cut was not planned
   • Not shown: the chart gives dates and sizes, not the committee's reasons

6. 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.

7. 5.

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

   • About 2.2: the rate rose 18.2 percent and borrowing fell 8.3, so the rate is the more responsive
   • About 0.46: borrowing falls 8.3 percent when the rate rises 18.2 percent, so it is not very responsive
   • About 8: borrowing fell by 8 million for a one-point rise in the rate
   • Elastic, because borrowing fell when the rate rose, which is how a loan market works
8. 6.

   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 does not fall below 92, so no rate on the table can meet the goal
   • No: borrowing falls only to 92; the table suggests about 7 percent, where it is 83
9. 7.

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

   • 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)
   • Borrowing responds more at higher rates: about 0.46 from 5 to 6 but about 1.06 from 7 to 8
   • The responses are equal, because borrowing falls by about 10 million per point in each range
10. 8.

    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 peaks at 6 percent, where the rate rise and the borrowing fall are about equal
    • 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 falls from the start, because borrowing falls at each step up in the rate
11. 9.

    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 right, because 8 percent earns $0.76 million more than 5 percent does at the same loans
    • 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
12. 10.

    A critic says a rise from 5 to 6 percent barely dents borrowing, so the tool is weak. Ari replies with the table. Which reply is best?

    • The critic is right, because a one-point rise cut just 8 million, which is small next to 100
    • The tool is weak in each range, because borrowing is not very responsive to the rate
    • The tool grows weaker as rates rise, because the dollar cuts get larger yet fall in percent
    • Small at low rates (about 0.46), larger at high rates (about 1.06), so bigger moves work more