The purpose of the commitment by the Fed to keep the federal

The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to

A) lower the long term interest rates.

B) lower the short term interest rates.

C) increase the long term interest rates.

D) increase the short term interest rates.

Solution

THE CORRECT OPTION IS OPTION (A) Lower the long-term interest rates.

Because fed (federal) funds rate is the rate at which banks lend to each other to meet reserve requirements.

When the federal funds rate is Zero, banks are incurring no cost while lending from other banks. Banks can extend loans to borrowers at the minimum rate.

Lower bank rate can help to expand the economy.

So, the option is (a).