Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy
What will be an ideal response?
When the Fed raises the federal funds rate it does so by decreasing banks' reserves. The decrease in reserves decreases the quantity of money. The supply of loanable funds decreases so the real interest rate rises. The higher real interest rate decreases investment and consumption expenditure, especially consumption expenditure on durable goods. In the foreign exchange market, the higher interest rates increase the attractiveness of U.S. securities. Foreigners increase their demand for U.S. dollars in order to purchase these securities and so the price of the dollar rises on the foreign exchange market. The rise in the price of the dollar makes exports more expensive to foreigners and imports less expensive to U.S. residents. As a result, exports decrease and imports increase so that net exports decrease. All of the changes decrease aggregate demand.
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To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. The sport equipment producers' share of this tax would be greater than shown in the above figure if
A) the demand was more elastic. B) the demand was more inelastic. C) the supply was more elastic. D) Both answers A and C are correct.
A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date
A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face
According to Keynes, the primary determinant of a person's saving is NOT
A) the person's level of income but the desired real income of the person. B) the person's level of savings but the expected interest rate in the near future. C) the interest rate but the level of savings the person has. D) the interest rate but the level of the person's real disposable income.
If you invest in a foreign company by buying 8 percent of its shares of stock, you have engaged in
A. adverse selection. B. foreign direct investment. C. moral hazard. D. portfolio investment.