Question

Describe the effects of an increase in the Federal Funds Target rate.

Answer 1

An increase in the Federal Funds Target rate meant that banks are less able to borrow money to keep ther reserves at the mandated level.Hence they lend less money and as a result the money they lend will be at higher rate because they are also borrowing money at a higher rate.This is called contractionary monetary policy.

Secondally,as loans are becoming costly,consumers and businessmen borrow less which slows down the economy.

Example-Adjustable-rate mortgages become more costly.Homebuyers are able to afford smaller loans due to which housing industry slows down.Housing prices goes down and owners of houses have less equity in their houses.They probably spend less and further economy may slow down.