What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate?
A)The equilibrium interest rate and the equilibrium rate of investment should both increase.
B)The equilibrium interest rate should increase,and the equilibrium rate of investment should decrease.
C)The equilibrium interest rate should decrease,and the equilibrium rate of investment should increase.
D)The equilibrium interest rate and the equilibrium rate of investment should both decrease.

Question

Quizplus · Accepted Answer

When the Fed decreases the discount rate, it becomes cheaper for banks to borrow money from the Fed. This causes an increase in the supply of loanable funds, as banks are now more willing to lend out money. With the increase in the supply of funds, the equilibrium interest rate should decrease. Additionally, with the lower interest rate, the rate of return on investment becomes more attractive, causing an increase in the rate of investment. Therefore, the equilibrium interest rate should decrease and the equilibrium rate of investment should increase.

What Should Happen to the Equilibrium Interest Rate and the Corresponding