1) State whether the following statement is true or false AND explain why: \"A d

Question

1) State whether the following statement is true or false AND explain why: "A decrease

in the discount rate will always cause a decrease in the federal reserve funds rate." Illustrate

your answer graphically using supply and demand model of the market for reserves. Label your

graphs, axes, lines, and points.

2) Using the aggregate demand-aggregate supply model, explain and demonstrate

graphically the short-run and long-run effects of an increase in the money supply on aggregate

output. How did it affect the other aggregate variables such us unemployment rate, price level

and inflation rate? Explain your graphs.

Explanation / Answer

False The Fed Funds rate is the rate at which the Federal Reserve "forces" interest rates to exist at in the broad economy of bank lending. The Fed's Discount Rate is the rate at which its costs to borrow money directly from the Federal Reserve. Typically the Discount Rate is higher than the Funds Rate to encourage borrowing from member banks and not the Federal Reserve itself. refer to below link http://www.google.co.in/url?sa=t&rct;=j&q;=ggregate demand-aggregate supply model&source;=web&cd;=5&cad;=rja&ved;=0CEsQFjAE&url;=http://webpages.shepherd.edu/lkinney/ECON 123/ADAS123.doc&ei;=u4B3UdiqMo-yrAe0qYHoAw&usg;=AFQjCNF9_Yx1UCBUauuiC2wMk8yJNJmsDA&bvm;=bv.45580626,d.bmk

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