Which of the following changes is observed when the Fed increases the federal funds rate?

A) Inflation is brought to an immediate halt.
B) The inflation rate increases for several months,but then begins to decrease.
C) Major banks try to offset this change by lowering the interest rates they charge on loans.
D) Major banks try to offset this change by lowering the interest rates they pay on savings deposits.
E) Major banks raise the prime interest rate that they charge to their best customers.

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Vanessa James · Accepted Answer

Final Answer : E, Explanation :  When the Fed increases the federal funds rate, it becomes more expensive for banks to borrow money. In response, banks typically raise the prime interest rate they charge their best customers to cover the higher cost of borrowing. This does not directly lead to an immediate halt in inflation, nor does it necessarily cause banks to lower the interest rates they charge on loans or pay on savings deposits. Instead, it can make borrowing more expensive across the board, which can, over time, help to cool down an overheating economy and potentially reduce inflation.

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