Author Question: If the Fed increases the discount rate, A) commercial banks pay a higher interest rate if they ... (Read 91 times)

audie · **on:** Jun 29, 2018

If the Fed increases the discount rate,

A) commercial banks pay a higher interest rate if they borrow from the Fed.
B) commercial banks find it more profitable to increase their loans to businesses.
C) commercial banks increase their lending to the Fed.
D) commercial banks' assets increase.
E) commercial banks pay a lower interest rate if they borrow from the Fed.

Question 2

Briefly define real and potential GDP, and explain the relationship between real GDP and potential GDP. How can we measure potential GDP?

What will be an ideal response?

SAUXC · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A

Answer to Question 2

Real GDP is the actual level of GDP, adjusted for inflation. Potential GDP is what the GDP would be if the economy was fully employed. Because of the business cycle, real GDP fluctuates around potential GDP. Thus real GDP is sometimes greater than potential GDP, sometimes smaller than potential GDP, and sometimes equal to potential GDP. Over time, the larger-than-normal and smaller-than-normal values cancel out and we can estimate potential GDP by using the average of real GDP.