A 1% Increase in the Fed Funds Rate,an Overnight Inter-Bank

question 20

Multiple Choice

A 1% increase in the fed funds rate,an overnight inter-bank rate often targeted by the Federal Reserve,is most likely to cause

• A) a 1% increase in prices within a year
• B) a nearly instantaneous increase in output and a reduction in unemployment
• C) a 1% increase in the money supply (M1) over a two-year period
• D) gradual reductions in the money supply, inflation, output, and employment
• E) other interest rates throughout the economy to fall by about 1%

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Definitions:

Budget Surplus

An excess of tax revenue over government spending

Loanable Funds

The resources available for borrowing in the financial markets, comprising savings and any other available funds.

National Saving

The total amount of savings generated within a country, including both private savings by individuals and businesses, and public savings from government budgets.

Net Capital Outflow

The variance between the act of local inhabitants investing overseas and international investors buying within the country.