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 FOMC targets the federal funds rate, which is a short-term nominal interest rate. However, in order to influence borrowing and spending decisions in the economy, they must also influence the real interest rate (which takes inflation into account). Therefore, choice A is the best answer as it recognizes the importance of the real interest rate in the FOMC's policy actions. Choices B, C, and D may also be influenced by the FOMC's actions, but are not as directly related to their target for the federal funds rate.

The FOMC Targets the Federal Funds Rate, but If They