When the Federal Reserve raises the bank lending rate, which of the following occur in the short run? A) The availability of funds declines and costs increase. B) The availability of funds declines and costs decline. C) Costs decline and interest rates rise. Your answer: B was incorrect. The correct answer was A) The availability of funds declines and costs increase. Increases in interest rates by the Fed is considered a restrictive economy policy. It is attempting to limit the availability of funds, causing interest rates and costs to rise. --------------------------------------------------------------------------------
Not sure what you are confused about, but when Fed raises bank lending rate --> more expensive for banks to borrow for its repo rate for required depository --> they will choose to put more of their own money as deposit as well as not willing to take such loans --> less money outstanding. Also they will also raise their lending rate to their customers --> business raise their business cost.
Thanks…this is one of late night working issues…I thought I marked A…did not notice that I had accidentally marked B