Final answer:
Lowering the federal funds rate target by the Fed usually results in a decrease in the federal funds rate and lowers other interest rates, thereby increasing the money supply and fostering economic activity.
Step-by-step explanation:
When the Federal Reserve (the Fed) lowers the federal funds rate target, it typically leads to a corresponding decrease in the federal funds rate itself and other related interest rates.
As the cost of borrowing overnight funds between banks becomes cheaper, it encourages banks to lend more, which increases the overall money supply in the economy.
This broader access to credit generally promotes borrowing and spending by businesses and consumers, potentially boosting economic activity.
While the federal funds rate primarily affects short-term interest rates, it also influences long-term rates but often to a lesser extent.
Furthermore, a reduction in the federal funds rate can lower the costs related to loans with longer maturities, such as those for purchasing houses and cars, although the impact is generally less than one-for-one.
The lowering of the federal funds rate aims to stimulate economic growth by making it cheaper for consumers and businesses to borrow, which can lead to increased investment and consumer spending on big-ticket items, ultimately affecting several components of aggregate demand.