Final answer:
The Federal Funds Rate affects consumer loans by leading to higher interest rates when it increases, and lower rates when it decreases. This influences the cost of borrowing for consumers and can impact investment and purchasing decisions for big-ticket items. The correct option is b) It increases interest rates for consumers.
Step-by-step explanation:
The Federal Funds Rate has a significant impact on consumers looking to take out a loan. The correct answer to how the Federal Funds Rate affects consumers seeking loans is b) It increases interest rates for consumers.
When the Federal Funds Rate rises, it leads to higher interest rates on consumer loans for items like houses and cars, making borrowing more expensive. Conversely, when the Federal Funds Rate drops, interest rates tend to decrease, making it cheaper for consumers to take out loans.
Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will make borrowing less attractive due to the increased cost of loans.
This will likely decrease business investment and consumer borrowing for big-ticket items. On the other hand, an expansionary monetary policy involving lower Federal Funds Rate can result in lower borrowing costs and encourage investment and large purchases by consumers.
While the Federal Funds Rate influences the general trend of interest rates in an economy, the specific rates for various loans, like a 30-year mortgage or a three-year car loan, are determined by the forces of supply and demand in the lending market.
Nonetheless, changes in the Federal Funds Rate are a powerful tool for affecting economic activity through adjustments in the cost of borrowing.
The correct option is b) It increases interest rates for consumers.