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Monetary Analysis

Suppose the Federal Reserve surprises everyone by sharply raising the federal funds rate. Explain how this action is likely to affect the nominal interest rates on (i) three-month Treasury bills (ii) ten-year Treasury bonds (iii) ten-year AAA corporate bonds and (iv) ten-year junk bonds. Compare the sizes

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SUPPOSE THE FEDERAL RESERVE SURPRISES EVERYONE BY SHARPLY RAISING THE FEDERAL FUNDS RATE.

The federal funds rate is the interest rate that one bank charges another for short term loans made between them. These loans are used to help the banks with their cash flow and reserve needs. When this rate increases the banks get more interested in holding on to their own funds. This is one method Federal Reserve uses to reign in inflation.

Explain how this action is likely to affect the nominal interest rates on (I) THREE-MONTH TREASURY BILLS (II) TEN-YEAR TREASURY BONDS (III) TEN-YEAR AAA CORPORATE BONDS AND (IV) TEN-YEAR JUNK BONDS. ...

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