Question

Distinguish between the Federal funds rate and the prime interest rate. Which of these two rates does the Fed explicitly target in undertaking its monetary policy?

Answer 1

Answer: The Fed wanted to encourage banks to raise their prime interest rates, slowinggrowth in investment, consumption, and aggregate demand to a noninflationary pace.

Explanation:

Federal funds interest rate could be as interest rate banks charge themselves on overnight loans in order to meet reserve requirement. While prime interest are interest rates banks charge on loans to their most credit worthy customer. The Fed wanted to encourage banks to raise their prime interest rates, slowinggrowth in investment, consumption, and aggregate demand to a noninflationary pace.The tight money policy successfully raised the prime interest rate.