If the Federal Reserve raises its discount rate, many observers regard this as a signal that the Fed is pushing for tighter credit conditions and market participants may respond by reducing their borrowings and curtailing their spending plans. The effect as described above is called the:
A) Announcement effect
B) Cost effect
C) Substitution effect
D) All of the above
E) None of the above

Question

Quizplus · Accepted Answer

The announcement effect refers to the market's reaction to news or policy changes announced by central banks or other authoritative bodies. In this case, when the Federal Reserve raises its discount rate, it signals a move towards tighter monetary policy, which can lead to reduced borrowing and spending as market participants anticipate higher costs for credit. This reaction is based on the announcement itself, rather than the direct impact of the policy change.

If the Federal Reserve Raises Its Discount Rate, Many Observers