How monetary policy works and tools used

The federal funds rate is the interest rate on:

The overnight interest rate between banks

The fed funds rate will not go below the interest rate on reserves, because:

banks will not be willing to lend to others at a rate below the interest rate they receive on reserves

If the Fed lowers interest rates, the value of the US dollar will_____ which will lead to a(n)_____ in spending on US goods

decrease; increase

We expect a low unemployment rate to lead to ____ inflation, since ____

higher, wages tend to increase when unemployment is low

If the unemployment rate is falling from 4 to 3%, while inflation is increasing to 5% the Fed will most likely:

increase the target for the federal funds rate

An increase in the expected inflation rate will lead to a ____ expected real interest rate for a given nominal interest rate and ___ spending on goods and services

lower; higher

If the Fed raises interest rates, it will be ___ for firms to borrow, and they will borrow ___ to start ___ new projects

more expensive; less; fewer

The upper limit to the federal funds rate is:

the discount rate, because if the federal funds rate were to go higher, banks would borrow from the Fed instead of from other banks

If the Fed has decided to change the federal funds rate target, the main interest rate they use to guide the federal funds rate to the new target is:

the interest rate on excess reserves

When bond interest rates fall, the relative expected return on holding stocks goes ___, which means that stock demand and thereby stock prices will ___, leading to an ___ in people's wealth and therefore in spending.

up, increase, increase