An Increase in the Interest Rate by the Federal Reserve

question 5

Multiple Choice

An increase in the interest rate by the Federal Reserve will affect only real interest rates because:

• A) inflation is sticky in the short run.
• B) of the quantity theory of money.
• C) prices are flexible in the short and long runs.
• D) contracts apply only in the very short run.
• E) we are in the long run.

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Definitions:

Actual Reserves

The physical quantity of a resource or commodity that is known to be available and extractable under current conditions.

Reserve Requirement

The minimum amount of reserves that banks are required to hold by law, set by the central bank to control money supply.

Time Deposits

Time Deposits are bank deposits that have a fixed term and usually offer a higher interest rate compared to regular savings accounts.

Primary Reserves

Primary reserves are liquid assets held by banks to meet short-term obligations and regulatory requirements, including cash and balances with the central bank.