Progressive Movement Practice Exam

What is a major purpose of the Federal Reserve System?

1. Deal with the trade deficit through tariffs and quotas

2. Control the minimum wage

3. Establish the Federal budget

4. Regulate interest rates and the money supply

The correct answer is: Regulate interest rates and the money supply

The Federal Reserve System, often referred to as the Fed, plays a crucial role in the United States economy primarily through its capacity to regulate interest rates and manage the money supply. This function is essential for maintaining economic stability, controlling inflation, and promoting sustainable economic growth. By adjusting interest rates, the Fed influences borrowing costs for consumers and businesses, impacting overall economic activity. Additionally, managing the money supply allows the Fed to respond to changing economic conditions, ensuring liquidity in the financial system and fostering a stable banking environment. The other options focus on functions that do not fall within the central bank's primary responsibilities. Trade deficits are typically managed through fiscal and trade policies rather than monetary ones. The minimum wage is determined by legislation at different levels of government, while the Federal budget is crafted and approved by Congress, signifying a clear division of responsibilities in economic governance. Thus, the role of the Federal Reserve in regulating interest rates and the money supply stands out as its significant purpose for influencing the economy effectively.