Certified Financial Planner (CFP) Practice Exam 2025 – All-in-One Study Guide for Exam Success!

The correct understanding of the reserve requirement is crucial for grasping how monetary policy functions. The reserve requirement refers to the minimum amount of reserves that a bank must hold against customer deposits. The reserve requirement is expressed as a percentage of total deposits, but it dictates the amount that must be retained in the bank and not what can be lent out. Hence, while banks can indeed lend out a portion of the deposits, the reserve requirement itself specifies only the minimum reserves they must maintain; it does not define the percentage of deposits they are allowed to lend out.

The emphasis on reserves illustrates the Federal Reserve's function in managing liquidity within the banking system and maintaining stability in the economy. The other statements accurately reflect aspects of the Federal Reserve's operations: the Federal Funds rate does determine the overnight lending rate between banks, the discount rate is specifically set for member banks borrowing directly from the Fed, and open market operations indeed involve the buying and selling of government securities to influence money supply and interest rates.