If the Fed reduces the discount rate, which of the following are most likely to result?
A) The money supply curve shifts rightward, and the equilibrium interest rate falls in the money market.
B) Investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy.
C) Investment rises, causing the aggregate demand curve to shift rightward, increasing equilibrium real GDP and thus accelerating the economy.
D) Both a. and b. above are correct.
E) Both a. and c. above are correct.

Question

Quizplus · Accepted Answer

When the Fed reduces the discount rate, banks can borrow money at a lower cost, which encourages them to increase lending. This leads to an increase in the money supply and a rightward shift in the money supply curve. As a result, the equilibrium interest rate falls in the money market, which is captured by choice A. This lower interest rate stimulates investment spending, which leads to an increase in the aggregate demand (AD) curve and a rightward shift in the AD curve. This shift in the AD curve leads to an increase in equilibrium real GDP and acceleration of the economy, as captured by choice C. Therefore, both choices A and C are correct.

If the Fed Reduces the Discount Rate, Which of the Following