Answer to Question #279814 in Macroeconomics for jen

Question

How FED fund rate influences on real interest rate, output, and inflation ?

Answer 1

The rate at which banks charge each other for borrowing funds is known as the funds funds rate. The Fed controls inflation in the economy by influencing the interest rates and the money supply.

If the Fed increases the fed funds rate, banks will borrow reserves from each other and the interest rate on borrowing will increase. This will reduce the inflation in the economy. As a result, the output will as well decrease as the high interest rate will discourage investment.