.I am reading Kaplan on LOS 16.k and it says that dec in short term rates also decrease LT rates. Can someone explain why A is the correct answer here since the question stem states “lease likely”? Thanks in advance!
A decrease in the target U.S. federal funds rate is least likely to result in:
A)a proportionate decrease in long-term interest rates.
B)an increase in consumer spending on durable goods.
C)depreciation of the U.S. dollar on the foreign exchange market.
Changes in the U.S. federal funds rate and changes in long-term interest rates are unlikely to be proportionate. Long-term rates are the sum of short-term rates and a premium for the expected rate of inflation. If a decrease (increase) in the target federal funds rate by the Fed causes economic agents to increase (decrease) their inflation expectations, the change in long-term rates will be less than the change in the federal funds rate. Increases in spending on consumer durables and a decrease in the foreign exchange value of the U.S. dollar are among the expected results of a decrease in the target U.S. federal funds rate. (Study Session 5, Module 16.2, LOS 16.k)