Question

If the Fed raises the federal funds rate

A. exports increase and imports decrease.

B. in the short run the interest rate falls.

C. investment increases.

D. exports decrease and imports increase.

E. real GDP increases.

Answer 1

The Federal fund rate is the short term interest rate at which banks and other financial institutions lend reserves to other depository institutions.

A high Federal fund rate implies contractionary monetary policy by the government - a high-interest rate for business and consumers and relatively low inflation. A high-interest rate leads to a fall in investment, and a fall in aggregate demand and employment.

Thus, export decreases and import increases.

Ans. (D)