Question

Like a driver applying a quick tap of the brakes, yesterday the Federal Reserve raised the cost of borrowing between banks (discount rate) to keep the U.S. economy from running ahead too fast. As a result, consumers can expect to pay a little more when buying homes, cars, and other big ticket items as well as when carrying credit card balances Why will the Fed’s actions described in the passage likely slow down the economy as intended?

Answer 1

Answer:

The Fed's actions will slow down the economy because banks will raise their own loan interest rates.

Explanation:

Now, the federal reserve's actions to raise the cost of borrowing between banks will definitely take its toll on virtually everyone because those banks whose cost of borrowing has been increased will not just sit back and incure the entire cost without finding a way to channel some of it, if not all of them to their customers.

This is to say that most of those banks will almost certainly take drastic measures to ensure that they too raised their own loan Interest rates and thereby making their customers to bear some of those cost. By so doing, consumers will now be expected to pay a lot more than usual when they go about purchasing homes, cars and other big ticket items because of the higher interest rates banks will place on their loans.

Since this will discourage a lot of people from borrowing and consequently not acquiring more, the Federal reserve would have achieved their aim of keeping the United States economy from running ahead too fast.