4. The Federal Reserve chair always looks at the employment number before alteri

Question

4. The Federal Reserve chair always looks at the employment number before altering the federal funds rate. Raising the federal funds rate is equivalent to raising the price of capital. (2 pts)

a. Explain how raising the federal funds rate could have a negative impact on employment in the long run? Be sure to use the words scale and/or substitution effect in your answer.

b.Could raising the federal fund rate increase employment in the long run? (Be sure to use the formula from class/your text.) Be sure to use the words scale and/or substitution effect in your answer.

c. What effect would raising the federal fund rate have on employment in the short run?

Explanation / Answer

Ans (a)- The federal funds rate is short term interest rate at which banks can borrow money from one another. Rise in interest rates may leads to less investment as it costs firms more to borrow, this will effect unemployment. It will lead to reduces consumption as mortgage repayment increase, borrowing money from banks costs more, less consumption, less demand for workers. But if the real interest rate is low, the cost of living, doing business and investing are also low. This stimulates the economy because home and car loans are more affordable. If people can borrow more, they'll spend more. Low real interest also weaken the dollar, when the dollar is weak foreign goods are more expensive, so Americans tend to buy amerAmeri made goods. This stimulates the economy because high demand for American goods increases employment and wages. The problem is it also leads to inflation, if society demands , the product price will go up. When inflation increases, economic begins to slower. The price of goods increases, and so demand for it wanes. Less demand leads to less production, and even unemployment ensues.

And (b)- Increase in the federal fund rate have the effect is is that borrowing money from the Fed is more expensive for banks. When the banks make borrowing more expensive, companies might not borrow as much and will pay higher rates on their loans. That has an impact across numerous categories, the following are-

The Prime rate- increasing in this, which represent the credit rate that banks extend to their credit worthy customer. As a higher prime rate means that banks will increase fixed, and variable rate borrowing costs when risk on less credit companies and consumer.

Credit card rates- Rates will be affected for credit cards and other loans as both require risk profiling of consumer seeking credit to make purchases.

And (c)- The Fed can control the interest rates through government securities. These investment can be bought or sold, depends on them. If central bank lower interest rate, it buys a lot of securities. With more money available, interest rate decreases. If federal raise interest rates , it sells securities. This adjust the federal funds rate, bank charge one another for short term loans. Changing the interest rate can stimulates economic growth and fight inflation.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.