Which of the following sequence of events follows a rise in the discount rate?
A) r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↑
B) r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓
C) r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑
D) r↑ ⇒ I↑ ⇒ AE↑ ⇒ Y↑

Question

Quizplus · Accepted Answer

A rise in the discount rate leads to an increase in the cost of borrowing for banks, which leads to a decrease in investment (I↓) by firms. This decrease in investment decreases aggregate expenditure (AE↓) which in turn leads to a decrease in real output (Y↓).

Which of the Following Sequence of Events Follows a Rise