Question

Assuming that the current Federal Fund Rate is 0.25%, and that all other economic input factors...

Assuming that the current Federal Fund Rate is 0.25%, and that all other economic input factors remain unchanged, what happens to the US Economy's GDP
when there is an increase to the Federal Fund Rate ?

a,GDP Increases

b,No Change to GDP

c,GDP Decreases

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Answer #1

Federal funds rate is the interest rate that the depository banks and the institutions have to hold with them so that they can lend it to other bank in emergency or the overnight basis, which means they can be used as an emergency fund as well

this results in the ultimate supply of the money in the economy and boost the GDP as well

when we increase the federal funds rate it means the more money or reserve should be held by the depository bank and less available for the money supply so as the federal fund increase the GDP will decrease

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