Suppose the economy is in long-run and short-run equilibrium. The Fed changes its policy by raising the difference between the discount rate and the federal funds rate. In the long run we would expect to observe

Question

Quizplus · Accepted Answer

When the Fed raises the difference between the discount rate and the federal funds rate, it becomes more expensive for banks to borrow money from the Fed, and they may in turn raise their own interest rates. This will likely slow down spending and investment in the economy, leading to a decrease in aggregate demand, and thus a lower price level in the long run.

Suppose the Economy Is in Long-Run and Short-Run Equilibrium