Quick Answer: What should occur if the Fed raises the discount rate quizlet?

Which shift should occur if the Fed raises the discount rate? The aggregate demand curve should shift leftward. The success of Fed intervention depends on how well: Changes in long-term interest rates mirror changes in short-term interest rates.

What should occur if the Fed raises the discount rate?

The net effects of raising the discount rate will be a decrease in the amount of reserves in the banking system. Fewer reserves will support fewer loans; the money supply will fall and market interest rates will rise. If the central bank lowers the discount rate it charges to banks, the process works in reverse.

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What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed increases the discount rate?

What should happen to the equilibrium interest rate and the corresponding rate of investment if the Fed decreases the discount rate? Equilibrium interest rate should decrease, and equilibrium rate of investment should increase.

In which of the following situations is expansionary monetary policy most effective?

In which of the following situations is expansionary monetary policy most effective? When the banking system lends out excess reserves, it complements Fed action that will result in successful monetary policy.

Which of the following explains why small reductions in interest rates may not lead?

Which of the following explains why small reductions in interest rates may not lead to an increase in investment spending? Excess capacity gives businesses little incentive to expand production capacity. … A downward-sloping demand curve, where more money is held at lower interest rates.

What is Fed discount rate?

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility—the discount window. … The discount rate on secondary credit is higher than the rate on primary credit.

What is a discount rate quizlet?

discount rate. the interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions.

Which shift is most likely to occur if the Fed reduces the required reserve ratio?

When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.

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Why does the Fed use monetary policy?

The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.

What actions of open market operations should the Fed take to control inflation quizlet?

In order to combat inflation, the Fed engages in an open market sale of bonds, decreasing the money supply and raising the interest rate.

What does an increase in input prices cause?

An increase in input prices will cause a leftward shift in the positively sloped portion of the aggregate supply curve. … If the price level is above the equilibrium price level, aggregate quantity supplied will exceed aggregate quantity demanded and pressure on prices.

Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure?

Which of the following is a reason why increases in the price level results in a decline in aggregate expenditure? As the price level rises, government spending falls, which lowers aggregate expenditures. Price level increases cause firms and consumers to hold more money, which raises the interest rate.

Which of the following is likely to cause monetary restraint to be effective?

Which of the following is likely to cause monetary restraint to be effective? High expectations overwhelm high interest rates. Businesses have the ability to borrow funds from foreign banks. People behave rationally and borrow less when interest rates rise.

Which of the following is an action that the Fed uses to increase or decrease the money supply?

To increase the (growth of the) money supply, the Fed could either buy bonds, lower the reserve requirement ratio, or lower the discount rate. To decrease the (growth of the) money supply, the Fed could either sell bonds, raise the reserve requirement ratio, or raise the discount rate. 25.

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How does the Fed influence interest rates?

The Fed sets target interest rates at which banks lend to each other overnight in order to maintain reserve requirements—this is known as the fed funds rate. … If the Fed raises interest rates, it increases the cost of borrowing, making both credit and investment more expensive.

How does the Fed increase money supply?

The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. … The Fed can also alter short-term interest rates by lowering (or raising) the discount rate that banks pay on short-term loans from the Fed.