When the Fed raises the federal funds rate, the long-term real interest rate ___
ID: 1127574 • Letter: W
Question
When the Fed raises the federal funds rate, the long-term real interest rate ______.
A.
rises the same day or the next day
B.
falls about one year later
C.
rises within a few months
D.
rises about one year later
The long-term interest rate fluctuates _______ than the short-term interest rate because _______.
A.
more; it is difficult to know what will happen in the economy in the long run
B.
more; long-term loans are riskier than short-term loans
C.
less; the Fed sets the federal funds rate, which is a short-term interest rate
D.
less; it is influenced by expectations about future short-term interest rates as well as current short-term interest rates
Explanation / Answer
1. When the fed raises fed funds rate the long term real interest rate rises about one year later as it takes time for people to adjust their long term expectations about interest rates.
2. The long term interest rates fluctuates more than the short term interest rate because it is difficult to know what will happen in the economy in the long run.
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