If the Federal Reserve lowers the discount rate, ceteris paribus, the equilibrium levels of funds lent will __________ and the equilibrium level of real interest rates will ___________.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
E)reverse direction from their previous trends; reverse direction from their previous trends

Question

Quizplus · Accepted Answer

A lower discount rate would encourage banks to make more loans, which would increase the money supply.The supply curve would shift to the right and the equilibrium level of funds would increase while the equilibrium interest rate would fall.

If the Federal Reserve Lowers the Discount Rate, Ceteris Paribus