Changes in the federal funds rate usually result in
A)changes in both short-term and long-term interest rates with more of an effect on short-term interest rates.
B)changes in both short-term and long-term interest rates with more of an effect on long-term interest rates.
C)changes in both short-term and long-term interest rates with equal effect on both.
D)no change in both short-term and long-term interest rates.

Question

Quizplus · Accepted Answer

Changes in the federal funds rate usually have a greater impact on short-term interest rates than on long-term interest rates. This is because the federal funds rate directly affects the cost of borrowing money in the short-term interbank market, which in turn affects short-term interest rates such as the prime rate, adjustable-rate mortgages, and short-term Treasury securities. Long-term interest rates, such as those for mortgages and corporate bonds, are influenced by a variety of factors, including inflation expectations, global economic conditions, and investor sentiment, in addition to short-term interest rates. Therefore, changes in the federal funds rate may have some impact on long-term interest rates, but not as much as on short-term interest rates.

Changes in the Federal Funds Rate Usually Result in