Final answer:
When the Federal Reserve lowers the federal funds rate, it usually results in increased economic activity and lower interest rates on loans such as car loans and home mortgages. It generally encourages new borrowing to finance business investment due to lower borrowing costs, not a decrease.
Step-by-step explanation:
If the Federal Reserve lowers the federal funds rate, several economic effects tend to occur as a result. Typically, with the lowering of the federal funds rate, we would see an increase in economic activity because cheaper borrowing costs can stimulate business investment and consumer spending.
Car loan and home mortgage rates, which are often tied to the federal funds rate, may also drop, making it less expensive for consumers to borrow for big-ticket purchases.
However, new borrowing to finance business investment is unlikely to decrease; in fact, it will most likely increase as the cost of borrowing is lower and businesses take this opportunity to invest and expand.
On the other hand, the profitability of banks could go either way. While interest income from loans might decrease, the lower rates may encourage more borrowing and could lead to higher loan volumes, which may or may not offset the lower interest income.
Therefore, the statement that banks will be more profitable is not a certain outcome of the federal funds rate decrease.