Which of the Following Changes Is Observed When the Fed

question 148

Multiple Choice

Which of the following changes is observed when the Fed increases the federal funds rate?

• A) Inflation is brought to an immediate halt.
• B) The inflation rate increases for several months, but then begins to decrease.
• C) Major banks try to offset the change in the federal funds rate by lowering the interest rates they charge on loans.
• D) Major banks try to offset the change in the federal funds rate by lowering the interest rates they pay on savings deposits.
• E) Major banks raise the prime interest rate that they charge to their best customers.

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Definitions:

Risk-neutral

Refers to individuals or entities that are indifferent between choices with varying levels of risk, focusing solely on the possible outcomes' expected values.

Risk-loving

A preference or inclination for taking on risks where the potential for gains outweighs the potential losses, as opposed to risk-aversion.

Risk-averse

describes an individual or entity that prefers to avoid risk and opts for the option with the least uncertainty.

Risk Premium

The additional return expected by an investor for taking on a higher level of risk compared with a risk-free investment.