When the FOMC raises the federal funds rate,almost immediately ________ and a few weeks later the ________.
A)short-term interest rates rise;quantity of money and supply of loanable funds decrease
B)long-term interest rates rise;quantity of money and supply of loanable funds decrease
C)short-term interest rates fall;quantity of money and supply of loanable funds decrease
D)long-term interest rates rise;quantity of money and supply of loanable funds increase
E)short-term interest rates fall;quantity of money and supply of loanable funds increase

Question

Quizplus · Accepted Answer

When the FOMC raises the federal funds rate, banks are charged more to borrow from the Federal Reserve, which increases the cost of borrowing for banks. To compensate, banks raise the interest rates they charge their customers, particularly for short-term loans. As a result, short-term interest rates rise almost immediately. Additionally, when interest rates rise, people tend to hold onto their money longer, which decreases the quantity of money and the supply of loanable funds in the economy. Therefore, choice A is the correct answer.

When the FOMC Raises the Federal Funds Rate,almost Immediately ________