Category: Economics

➤ How does the federal funds rate differ from the discount rate and prime rate?
The federal funds rate is the interbank overnight rate. The discount rate is what the Federal Reserve charges banks at the discount window. The prime rate is the interest banks charge their best corporate customers. Treasury bill rates are yields on short-term government securities and are driven by market demand, not direct Fed targets.

Which competitive practice is prohibited by the Sherman Act?
Market pricing
Seasonal pricing strategies
Adaptive pricing strategies

(a) Distinguish Hall’s random walk theory from Friedman’s permanent income hypothesis of consumption.(b) Discuss factors influencing saving behavior in developing countries.

➤ How does a firm choose the size of its new production facility?
A firm compares expected demand and revenue to long-run costs. It selects capacity where expected marginal revenue equals marginal cost and long-run average cost is minimized, considering economies of scale. Include fixed installation costs, flexibility for demand swings, financing costs, and risk, using scenario analysis and discounted cash flows.

2. How does unemployment affect the Fed’s decision on rate hikes?
Unemployment signals slack in the economy and affects inflation pressure. High unemployment reduces wage growth and lowers inflation risk, which supports keeping rates low. Falling unemployment can raise wage inflation and push the Fed toward tightening. The FOMC examines unemployment alongside wage data, labor participation, and productivity to set policy timing.