What is the relationship between the Federal funds rate and the prime interest rate? Why doesn’t the Federal Reserve target the prime interest rate?
What will be an ideal response?
The prime interest rate is the rate that banks charge their most creditworthy customers. It is a benchmark rate for banks. Other rates are based on it. It rises and falls with the Federal funds rate. When the Federal Reserve seeks to increase or decrease the Federal funds rate, it winds up increasing or decreasing the prime interest rate, and thus influencing the whole economy. The Federal funds rate is easier for the Federal Reserve to influence immediately given its direct control over bank reserves. The Federal funds rate is set by the market for excess bank reserves.
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In the above figure, the demand for loanable funds curve is drawn for the average expected profit. If the real interest rate is constant at 6 percent and the expected profit falls, the amount of loanable funds demanded will be
A) less than $450 billion. B) $450 billion. C) between $450 billion and $600 billion. D) greater than $600 billion.
Frictional unemployment comes about because of
A) friction between labor and management. B) a mismatch between skills and available jobs. C) normal labor market turnover. D) a general economic slowdown.