Chapter 15, Problem 7AA

To determine

To choose: The suitable word that best completes the sentence.

Explanation of Solution

The suitable word that best completes the sentence is contract.

The interest rate that is charged by banks on each other for loans that is given for usually overnight is referred as Federal funds rate. If Fed reduces the Federal funds rate, banks will borrow and lend more. On contrary, if Fed increases the Federal funds rate, the banks will reduce borrowing from other banks and will raise the interest rates that they charge from their own customers. Hence, the economic activities can contract.

Economics Concept Introduction

Introduction:

Federal Reserve- The Federal Reserve was formed in the year 1913 by Congress to act as the central banking organization of nation. It is a system or network of banks. The Federal Reserve or Fed is the body responsible for forming the monetary policies in the United States.