A decision by the Fed to raise the discount rate (rate at which Fed lends to banks) will: a) increase output by raising the money supply and lowering the interest rate b) decrease output by lowering the money supply and raising interest rates c) decrease output by raising the money supply and raising interest rates d) increase output by lowering the money supply and raising interest rates

A decision by the Fed to raise the discount rate (rate at which Fed lends to banks) will: a) increase output by raising the money supply and lowering the interest rate b) decrease output by lowering the money supply and raising interest rates c) decrease output by raising the money supply and raising interest rates d) increase output by lowering the money supply and raising interest rates

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter26: Monetary Policy

Section: Chapter Questions

Problem 5SQ

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2) During the financial crises and recession of 2007-09, the Fed lowered the federal funds rate target to 0-0.25%. However, long-term interest rates, like mortgage rates, were still fairly high. One thing the Fed did to lower long-term rates was that the Fed : A) bought long-term bonds B) lowered the long-term interest rates by lowering the reverse repo rate C) lowered the long-term interest rates by lowering the discount rate D) sold long-term bonds
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Fed Cuts Key Interest Rate Again Washington, DC—Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. The Fed cut the discount rate, dropping it from 2.75 percent at the beginning of the year to a mere 0.25 percent now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession. If every one-point change in the federal funds rate alters aggregate demand by $180 billion, how far would AD shift in response to the interest rate cuts?
Interest rate Answer Bank increase in the price level Interest rate 10% 9 8 D ง 2 Interest rate 10% Money supply 9 8 Money supply 7 7 6 6 5 5 4 Money demand (1) 4 3 3 2 2 1 0 Money demand 0 1 2 345 6 7 8 9 10 1 2 3 4 Money (in billions) Money demand Money demand (1) 5 6 7 8 9 10 Money (in billions) Answer Bank decrease in the price level increase in output decrease in output increase in the price level
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