If the Fed increases the federal funds rate
A)inflation is brought to an immediate halt
B)the inflation rate increases for several months, but then begins to decreases
C)major banks try to offset this change by lowering the interest rates they charge on loans
D)major banks try to offset this change by lowering the interest rates they pay on savings deposits
E)major banks raise the prime interest rate that they charge to their best customers

Question

Quizplus · Accepted Answer

When the Fed increases the federal funds rate, major banks typically respond by raising the prime interest rate that they charge to their best customers. This is because the cost of borrowing for the banks has increased, and they need to offset this by increasing the interest rates they charge to their own customers.

If the Fed Increases the Federal Funds Rate