Suppose that the Federal Reserve decreases the federal funds rate by 1 percent.What would we expect to happen to the long-term expected real interest rate?

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the federal funds rate, it leads to a decrease in borrowing costs for businesses and consumers. This increase in demand for credit leads to an increase in the prices of financial assets, which in turn causes the long-term expected real interest rate to decrease by less than 1 percent. Therefore, the correct answer is C.

Suppose That the Federal Reserve Decreases the Federal Funds Rate