When the Federal Reserve increases the federal funds rate, bank loans ________, the supply of loanable funds ________, and the real interest rate ________.

Question

Quizplus · Accepted Answer

When the Fed increases the federal funds rate, banks have to pay a higher interest rate for borrowing from the Fed, so they increase the interest rates they charge on loans to maintain profit margins. This makes bank loans more expensive, which decreases the demand for loans and lowers the supply of loanable funds available for lending. When the supply of loanable funds decreases, the real interest rate (the interest rate adjusted for inflation) rises, as lenders will charge higher interest rates to cover the decrease in supply.

When the Federal Reserve Increases the Federal Funds Rate, Bank