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 ___________.

Question

Quizplus · Accepted Answer

Lowering the discount rate makes it cheaper for banks to borrow from the Federal Reserve. This will encourage banks to borrow more funds, leading to an increase in the equilibrium levels of funds lent.  As banks will have more funds to lend to consumers and firms, it will lead to higher demand for loans, which will lead to a decrease in the equilibrium level of real interest rates.

If the Federal Reserve Lowers the Discount Rate,ceteris Paribus,the Equilibrium