In the short run, when the Fed raises the federal funds rate,

Question

Quizplus · Accepted Answer

When the Fed raises the federal funds rate, it becomes more expensive for banks to borrow money and thus they raise the interest rates they charge their customers. This leads to a temporary increase in the real interest rate, which decreases investment and consumption expenditure. This is because the higher real interest rate makes borrowing more expensive, and therefore discourages firms and individuals from making investments or purchases that require financing. In the long run, however, the higher interest rates may attract foreign capital and increase savings, leading to lower interest rates and higher investment over time.

In the Short Run, When the Fed Raises the Federal