Lowering the target for the federal funds rate is unlikely to be effective in fighting a recession when a(n)________ in the risk premium demanded by investors causes a ________ in interest rates.
A) increase; rise
B) increase; fall
C) decrease; rise
D) decrease; fall

Question

Quizplus · Accepted Answer

An increase in the risk premium demanded by investors typically leads to a rise in interest rates, as lenders require higher returns to compensate for increased risk. Lowering the federal funds rate in this scenario may not effectively combat a recession if the overall interest rates remain high due to the increased risk premium.

Lowering the Target for the Federal Funds Rate Is Unlikely