--%>

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 : Open-Economy Macroeconomics

    Open-Economy Macroeconomics   Suppose the structure of an economy with a flexible exchange rates is represented by:   C = 200 + 0.85*(Y - T)             &n

  • Q : Define Depreciation Depreciation of a

    Depreciation of a currency signifies fall in value of domestic currency in terms of foreign currency. Illustration: When value of rupee in terms of US dollars falls, state from Rs. 45 to Rs. 50 per dollar, it will be a condition of depreciation of Ind

  • Q : Methods that FED can use to make money

    What are the four methods that FED can use to make money? What are the most powerful one and what technique the FED to create a gradual easing of the money supply either created or destroyed most seldom uses?

  • Q : Explain about the marginalism theory

    Most economists believe such that people increase an activity when they perceive the expected additional benefits as exceeding the expected extra cost, but decrease their level of an activity whenever they believe the benefits from the last few units of the activity a

  • 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.

  • Q : Internet technology in airline

    Speculate regarding the behavior which could result from Internet technology in airline transactions and propose 2 or more strategies to deal with them.

  • Q : Surplus of AD over AS-Inflationary gap

    Does a surplus of AD over AS always entail a condition of inflationary gap? Answer: No. Inflationary gap takes place only if AD > AS equivalent to full employmen

  • Q : Relationship between interest rate and

    What is the relationship among interest rate and bond prices? Is there any difference among T-Bills versus Corporate bonds in reaching your assessment? Whenever the stock market falls, where do you assume that most investor place their money and why?<

  • Q : When Macroeconomic theory least related

    Macroeconomic theory would be least related in analyzing the results of: (w) optional ways of funding deficits in international trade. (x) U.S. federal budget deficits. (y) consumer items purchased through middle-income families. (z) deficit spending through the United Nations.

  • Q : Repayment of loan-Capital expenditure

    Why the repayment of loan is a capital expenditure? Answer: Repayment of loan is taken as a capital expenditure since it diminishes the liabilities of Government.