One Reason the Target Federal Funds Rate May Not Equal

question 40

Multiple Choice

One reason the target federal funds rate may not equal the actual federal funds rate is because:

• A)there is no way that the Fed could keep the actual rate at the target rate.
• B)the target rate changes with the demand for reserves.
• C)attaining the target rate involves forecasting reserve demand and forecasts are subject to error.
• D)none of the answers is correct; the target and the actual federal funds rates are always equal.

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Definitions:

Net Exports

The value of a country's total exports minus its total imports, representing the net trade balance.

MPC

The Marginal Propensity to Consume, representing the proportion of any additional income that a consumer spends on goods and services, as opposed to saving it.

Crowding Out

The phenomenon where increased government spending leads to a reduction in private sector investment, due to higher interest rates or the consumption of financial resources.

Aggregate Demand

The aggregate need for goods and services in an economy at a specific price level and during a certain time frame.