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This question was discussed in detail during the July 2020 episode of the BIF Bites podcast!
What action will be taken by Congress or the Fed in an environment with high unemployment, falling stock prices, and declining consumer spending?
- The Fed will lower the prime rate.
- The Fed will sell securities.
- Congress will authorize spending programs.
- The Fed will raise the discount rate.
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Correct answer: C. Congress will authorize spending programs.
Instructor insight:
At times of high unemployment, the Federal Reserve will implement strategies to ease lending and infuse capital into the economy, while Congress will work to create laws that encourage consumer spending, support businesses, and lower taxes, increasing discretionary income. Of the options available, the only action that will promote economic growth is Congress enacting a spending program.
The Fed does not set the prime rate. If the Fed sells securities or raises the discount rate it would be tightening credit. Finally, if the Fed sells securities, it receives money in exchange. The economic effect of this is removing money from the economy which is a restrictive action that will not promote spending or growth.
CFP® Exam tip:
Looking for a trick to help remember which entity controls which actions? Commit to memory that the "C" in fiscal stands for Congress. Congress has authority to create laws that may potentially impact access to capital and/or taxation.
Little tricks like this one can go a long way.
