ECONOMICS
MONETARY POLICY
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
there are risks of too much inflation
|
|
|
the economy is headed for a recession
|
|
|
Either A or B
|
|
|
None of the above
|
Detailed explanation-1: -What Happens When the Fed Raises Rates? When the Fed raises the federal funds target rate, the goal is to increase the cost of credit throughout the economy. Higher interest rates make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments.
Detailed explanation-2: -How the Fed Funds Rate Manages Inflation. The opposite occurs when the Fed raises rates. This is called “contractionary monetary policy, ” because it slows the economy. The cost of loans grows higher, resulting in consumers and businesses borrowing less.
Detailed explanation-3: -When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates. Open market purchases increase the money supply, which makes money less valuable and reduces the interest rate in the money market.
Detailed explanation-4: -Rising interest rates tend to slow the growth of inflation. One way to describe inflation is “too much money chasing too few goods.” If either the supply of goods increases or the amount of consumption declines, inflation tends to level out, or even decline.