When the Fed raises the federal funds rate,
A)the real interest rate is unchanged so investment and consumption expenditure are not changed.
B)the real interest rate increases,thereby decreasing investment and consumption expenditure.
C)the real interest rate falls,thereby increasing investment and consumption expenditure.
D)investment and consumption expenditure increase,thereby raising the real interest rate.
E)the real interest rate increases,thereby decreasing investment and increasing consumption expenditure.

Question

Quizplus · Accepted Answer

When the Fed raises the federal funds rate, it increases the cost of borrowing for banks, which in turn increases the cost of borrowing for consumers and businesses. This leads to a higher real interest rate, as the nominal interest rate increases while the inflation rate remains unchanged. When the real interest rate increases, it becomes more expensive for businesses to borrow money for investments and for consumers to borrow money for big purchases, which reduces investment and consumption expenditure.

When the Fed Raises the Federal Funds Rate