When the Federal Reserve increases the Federal funds rate,

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the Federal funds rate, it makes it more expensive for banks to borrow from each other. This, in turn, makes it more expensive for banks to lend money to businesses and consumers. As a result, the supply of bank loans decreases. The supply of loanable funds also decreases because people are less likely to save money when interest rates are high. The decrease in the supply of loanable funds leads to an increase in the real interest rate.

When the Federal Reserve Increases the Federal Funds Rate