--%>
Assignment Help - homework help

The Fed can control the Fed funds rate

Question:

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate

Answer:

It is true that the Fed can control the short term interest rates through its monetary policy. However, the long term interest rates are a resultant of mainly variables which make the control of Fed over it difficult. Long term interest rates are formed by expectation which builds up over the period of time. Also, an external shock can cause investors to shift their money from short term to long term bonds or vice-versa which will affect both type of interest rate. Fed, in that case, can control the short run interest rate by monetary policy changes, but the long term rates will depend upon how the investors perceive that monetary change. Based upon their perception and expectations about the future, they decide their investment decisions which decide the long term interest rates.

 

   Related Questions in Macroeconomics

  • Q : Market Economy Explain the statement "

    Explain the statement "Hypothes is the basic short run and long run behaviors of the airline industry in a market economy".

    		•
  • Q : Internet technology in airline

    Speculate regarding the behavior which could result from Internet technology in airline transactions and propose 2 or more strategies to deal with them.

    		•
  • Q : Illustration of arbitrage The

    The illustration of arbitrage takes place when: (1) Enterprising students purchase used textbooks much cheaply on E-Bay and sell them to another students at lower prices than bookstore charges. (2) Ivan purchases a stock when it is cheap and sells it

    		•
  • Q : Microeconomic analysis emphasizing to

    Family member to macroeconomics, the microeconomic analysis: (w) was emphasized through economists prior to the Great Depression. (x) is related with the effects of extensive government policies. (y) focuses upon economic development

    		•
  • Q : Difficulty of scarcity People in whole

    People in whole the world confront the difficulty of scarcity at always because: (i) restricted resources and times preclude producing all the goods people need. (ii) greedy capitalist monopolies charge excessively high prices. (iii) international mar

    		•
  • Q : Why value of MPC is not greater than one

    Why the value of MPC is not greater than 1? Answer: This is because change in consumption can never be more than change in income.

    		•
  • Q : Consequence of investment in economy

    When in an economy intended investment is more than intended savings, then what is the consequence of it on the national income? Answer: When I > S, the level of

    		•
  • Q : Borrowings and recovery of loans

    Categorize the borrowings and recovery of loans into capital and revenue receipts of government budget. Give reason too.

    		•
  • Q : Why is tax not a capital receipt

    Illustrate, why is tax not a capital receipt?

    		•
  • Q : Sources of demand for foreign currency

    State main sources of demand for foreign currency? Answer: The four main sources of demand for foreign currency are as follows: A) To buy services and goods from other countries. B) To send a gift abroad.