Assume the Fed wants to lower the interest rate. How does the Fed ...

[CBme]

Assume the Fed wants to lower the interest rate. How does the Fed lower the interest rate in the short run?
 
  What will be an ideal response?

Question 2

In the short run, how is the nominal interest rate determined? If the nominal interest rate is less than the equilibrium nominal interest rate, what occurs?
 
  What will be an ideal response?

[juliaf]

Answer to Question 1

In order to lower the interest rate, the Fed increases the quantity of money. In the short run, when the quantity of money increases, the interest rate falls.

Answer to Question 2

The nominal interest rate is determined in the money market by the interaction of the demand for money and the supply of money. If the nominal interest rate is less than the equilibrium, there is an excess demand for money. In order to increase the quantity of money they hold, people sell bonds and other financial assets. As a result, the price of financial assets falls and the interest rate rises. People continue to sell assets and the interest rate continues to rise until it reaches its equilibrium.

[CBme]

Correct answers!

[juliaf]

Great! Please up vote