Suppose that the Federal Reserve increases 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

The long-term expected real interest rate is influenced by many factors, not just the federal funds rate. Therefore, it is unlikely that the long-term expected real interest rate will change by the same amount as the increase in the federal funds rate. We would expect the increase in the federal funds rate to have a smaller impact on the long-term expected real interest rate, likely resulting in an increase that is less than 1 percent.

Suppose That the Federal Reserve Increases the Federal Funds Rate