If the Current Market Federal Funds Rate Equals the Target

question 103

Multiple Choice

If the current market federal funds rate equals the target rate and the demand for reserves decreases, the likely response in the federal funds market will be:

• A)the market federal funds rate will decrease.
• B)the market federal funds rate will equal the target rate.
• C)the market federal funds rate will increase.
• D)nothing; the Fed would act immediately and the market would not be affected.

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Definitions:

Fixed Costs

Costs that do not vary with the level of output or sales over the short term, such as rent or salaries.

Variable Costs

Costs that vary in direct proportion to changes in production or sales volume, such as materials and labor.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, determined by the proportion of fixed costs to variable costs.

Variable Costs

Costs that change directly in proportion to changes in the volume of production or activity level, such as raw materials, labor costs directly tied to production, and utility costs for manufacturing facilities.