Answer to Question #151304 in Macroeconomics for aa

Question

Suppose the Fed targets for an inflation of 2%. She projects an economic growth rate of 3%. The current real interest rate is 4%

What should be the corresponding targeted federal fund rate? Briefly explain your answer.

Answer 1

Federal Fund Rate (which is also known as Fed Fund Rate or Fed Rate) is the rate of interest that banks charge each other on overnight loans in the USA (in Indian market it is known as the Call Money Market), which is announced by the US central bank Federal Reserve (in India its counterpart is the RBI).

The fed funds rate is the interest rate banks charge each other to lend FederalReserve funds overnight. The Federal Reserve uses the fed funds rate as a tool to control U.S. economic growth. That makes it the most important interest rate in the world.