--%>
Assignment Help - homework help

The Fed can control the Fed funds rate

Question:

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate

Answer:

It is true that the Fed can control the short term interest rates through its monetary policy. However, the long term interest rates are a resultant of mainly variables which make the control of Fed over it difficult. Long term interest rates are formed by expectation which builds up over the period of time. Also, an external shock can cause investors to shift their money from short term to long term bonds or vice-versa which will affect both type of interest rate. Fed, in that case, can control the short run interest rate by monetary policy changes, but the long term rates will depend upon how the investors perceive that monetary change. Based upon their perception and expectations about the future, they decide their investment decisions which decide the long term interest rates.

 

   Related Questions in Macroeconomics

  • Q : Is sale of scooter is national income

    Describe whether the sale of old scooter is comprised in national income?

    		•
  • Q : In which of these two statements

    "In corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand."

    		•
  • Q : Equilibrium The equilibrium interest

    The equilibrium interest rate is determined

    		•
  • Q : What is substitutes Substitutes : The

    Substitutes: The two goods for which a rise in the price of one good leads to a rise in the demand for another.

    		•
  • Q : Rates of addiction and existence in a

    Harsher punishments for drug dealers than for addicts can’t be blamed for higher: (1) rates of police corruption because main dealers can present big bribes. (2) rates of street crime by addicts. (3) profits reaped by successful pushers who are uncaught. (4) rat

    		•
  • Q : Value of imports of goods The country’s

    The country’s balance of trade is Rs.500 crores. The value of exports of goods is Rs. 650 crores. What is the value of imports of goods?

    		•
  • Q : Define fiscal policy Define fiscal

    Define fiscal policy? Answer: Fiscal policy is the revenue and expenditure policy of government with a view to combat the state of inflationary or deflationary gap

    		•
  • Q : Difficulty of scarcity People in whole

    People in whole the world confront the difficulty of scarcity at always because: (i) restricted resources and times preclude producing all the goods people need. (ii) greedy capitalist monopolies charge excessively high prices. (iii) international mar

    		•
  • Q : Why tax considered as revenue receipt

    Why is tax considered as revenue receipt? Answer: Since tax neither makes a liability for government nor decreases assets of the government.

    		•
  • Q : Implication of Fiscal deficit

    Implication of Fiscal deficit A) It raise the supply of money in the economyB) It rises financial burden for future generation.C) It is the cause of inflation.

    		•