Which statement reflects the most probable impact on the prime interest rate of
ID: 1123699 • Letter: W
Question
Which statement reflects the most probable impact on the prime interest rate of a change in the federal funds rate? O The prime rate will move in the same direction as the federal funds rate. The prime rate will move closer to the federal funds rate if the federal funds rate rises, and farther from it if the federal funds rate falls. The prime rate will move farther from the federal funds rate if the federal funds rate rises, and closer to it if the federal funds rate falls. O The prime rate will move in the opposite direction as the federal funds rate.Explanation / Answer
The prime rate decreases if there's a decrease in the federal rate. The federal rate is nothing but the rate at which financial institutions lend to each other and if this becomes lower then the rate at which commercial banks lend out the amount i.e. the prime rate, decreases too.
Therefore, these two rates share a direct relationship.
OPTION A
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