Question

how does increasing the federal funds rate affect the economy? a. a higher federal funds rate discourages consumer spending and reduces business investment. b. a higher federal funds rate encourages consumer spending and increases business investment. c. a higher federal funds rate results in a higher return for investors, which encourages spending and investment. d. a higher federal funds rate results in a stronger dollar, which decreases the trade deficit.

Answer 1

A higher federal funds rate discourages consumer spending and reduces business investment.

Step-by-step explanation:

A higher federal funds rate affects the economy in several ways. Firstly, it discourages consumer spending and reduces business investment. When interest rates are higher, it becomes more expensive for individuals and businesses to borrow money, which reduces their spending. Additionally, higher interest rates make financial investments more attractive compared to physical investments, leading to a decline in business investment. Lastly, higher interest rates also discourage consumer borrowing for big-ticket items like houses and cars. Overall, a higher federal funds rate tends to have a contractionary effect on the economy.