Question

The FED recently increased the Federal Funds nate to 49. Which of the following implications would result?

a) LIBOR becomes 8%
b) The prime rate becomes 7%
c) The discount rate becones 5% .
d) The mortsage rate becomes 6% .
e) Inflation rate becomes 6.5%.

Answer 1

When the Federal Reserve increases the Federal Funds rate, it can have various implications on interest rates and inflation. The exact impact on different rates, such as LIBOR, the prime rate, discount rate, and mortgage rates, can vary. Similarly, the effect on the inflation rate is not a direct outcome of the Federal Funds rate increase but is managed by the Federal Reserve's monetary policy.

Step-by-step explanation:

When the Federal Reserve increases the Federal Funds rate, it generally leads to an increase in interest rates across the economy. Let's break down the implications:

1. LIBOR becomes 8%: It is difficult to determine the exact impact on LIBOR (London Interbank Offered Rate), but it is likely to increase as the Federal Funds rate increases.
2. The prime rate becomes 7%: The prime rate is typically influenced by the Federal Funds rate, so if the Federal Funds rate increases to 49%, it is likely to lead to an increase in the prime rate.
3. The discount rate becomes 5%: The discount rate is set by the Federal Reserve, and an increase in the Federal Funds rate could impact the discount rate, leading to a potential increase.
4. The mortgage rate becomes 6%: Mortgage rates are influenced by various factors such as the Federal Funds rate, market conditions, and borrower qualifications. An increase in the Federal Funds rate could contribute to an increase in mortgage rates, but it is dependent on other factors as well.
5. Inflation rate becomes 6.5%: The Federal Reserve adjusts the Federal Funds rate to manage inflation. If the Federal Funds rate increases to 49%, it is likely a move to control inflation. However, it doesn't necessarily mean that the inflation rate will automatically become 6.5%. The relationship between the Federal Funds rate and inflation is complex and influenced by other factors.