Suppose the Fed raises the federal funds rate.Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards: i. short-term interest rates rise
Ii) long-term interest real interest rate rises
Iii) aggregate demand decreases
Iv) inflation rate decreases

Question

Quizplus · Accepted Answer

When the Fed raises the federal funds rate, short-term interest rates rise almost immediately. This is followed by an increase in long-term real interest rates. As borrowing costs rise, aggregate demand decreases. Finally, the inflation rate decreases as a result of reduced demand.

Suppose the Fed Raises the Federal Funds Rate