Question

When the Federal Reserve increases the Federal funds rate_________ Group of answer choices a) both the supply of bank loans and the supply of loanable funds decrease, thereby increasing the real interest rate. b) the supply of bank loans decreases, while the supply of loanable funds and the real interest rate both increase. c) both the supply of bank loans and the supply of loanable funds increase, while the real interest rate increases. d) both the supply of bank loans and the supply of loanable funds increase, thereby decreasing the real interest rate.

Answer 1

When the Federal Reserve increases the Federal funds rate both the supply of bank loans and the supply of loanable funds decrease, thereby increasing the real interest rate.

Answer: Option A

Explanation:

The interest rates and the available quantity of loanable funds are affected by monetary policy and they affect several points of total demand. The higher interest rates and deducted quantity of loanable funds result from a compact monetary policy which in return reduce the two components of total demand.

There will be a downfall in business investment because it is less pleasing for firms to borrow money and even firms fulfilled with money notice that with higher interest rates it is comparatively more comfortable to put those funds in a financial investment than to shape investment in the capital of physical category.

Although higher interest rates will prevent consumer borrowing for high-value materials like cars and houses. Therefore, low-interest-rate results from loose or expansionary monetary policy.