Washington, DC-Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again...

 

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Washington, DC-Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. This is the eighth time this year the Fed had cut the discount rate, dropping it from 4.75 percent at the beginning of the year to a mere 0.50 percent now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession. Source: News accounts of December 16-18, 2008. If every one-point change in the federal funds rate alters aggregate demand by $200 billion, how far did AD shift in response to the interest rate cuts? AD shifted to the by billion. Washington, DC-Alarmed by the rapidly weakening economy, the Federal Reserve cut a key interest rate again yesterday. This is the eighth time this year the Fed had cut the discount rate, dropping it from 4.75 percent at the beginning of the year to a mere 0.50 percent now. The discount rate is the rate the Fed charges for loans it makes to private banks. By dropping the rate, the Fed is hoping banks will borrow more money, then use that money to make new loans to businesses and consumers. What has spooked the Fed is that GDP is falling at the fastest rate in 50 years. The Fed is hoping that record low interest rates will prompt more spending, preventing a protracted recession. Source: News accounts of December 16-18, 2008. If every one-point change in the federal funds rate alters aggregate demand by $200 billion, how far did AD shift in response to the interest rate cuts? AD shifted to the by billion.

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