Question

Which of the following is an action of the Federal Reserve that strongly influences local economies?

Answer 1

Answer:

"They make loans more expensive or cheaper" is an action of the Federal Reserve that strongly influences local economies.

Explanation:

• The key to knowing how the Fed influences local economies is the market for bank reserves.

• When customers deposit fund into their 'checking account', the bank must keep a fraction of the deposit as reserves.

• The market for these inter bank loans of reserves is called the 'federal funds market', and the rate banks pay for the loans is the federal funds rate.

• By changing the supply of reserves and federal funds rate, the Fed can increase or decrease interest rates in the market.

• If it wants to stimulate the economy, it lowers interest rates to make loans economical.

• This generates more loans to finance investments, consumption of durable goods.