Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to be the new money market equilibrium?

Question

Quizplus · Accepted Answer

When the Fed raises the discount rate, it becomes more expensive for banks to borrow from the Fed, causing them to reduce their borrowing and lending. This would lead to a decrease in the money supply and an increase in the interest rate. Therefore, choice A is the most likely option as it features a higher interest rate and a smaller quantity of money. Choice C and D are unlikely as they feature an increase in the money supply, which does not match the actions of the Fed. Choice B does not account for the impact of the discount rate change on the money market equilibrium.

Suppose That the Current Money Market Equilibrium Features an Interest