The FOMC targets the federal funds rate, but if they are going to alter the course of the economy they must influence the:
A) real interest rate as well.
B) long-term nominal interest rate as well.
C) real exchange rate as well.
D) nominal exchange rate as well.

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. By influencing both the nominal interest rate and inflation, the FOMC can impact the real interest rate, which in turn affects borrowing and investment decisions by households and businesses, ultimately impacting the economy as a whole. While the long-term nominal interest rate, real exchange rate, and nominal exchange rate can all have an impact on the economy, they are not direct targets of the FOMC's policy decisions.

The FOMC Targets the Federal Funds Rate, but If They