If the Federal Reserve votes to lowers the discount rate, how will this likely affect interest rates on short-term credit?

If the Federal Reserve votes to lowers the discount rate, how will this likely affect interest rates on short-term credit?

• A. They will likely increase
• B. They will remain the same
• C. They will likely decrease
• D. They will fluctuate significantly

Answer: (C)

When the Federal Reserve lowers the discount rate, it reduces the cost for banks to borrow money from the central bank. As banks find it cheaper to borrow, they are more likely to pass these savings onto consumers and businesses through lower interest rates on short-term loans and credit. This typically leads to a decrease in interest rates for various forms of short-term credit, as the overall cost of borrowing has been reduced. Lower interest rates on short-term credit can stimulate economic activity by making loans more affordable. Consumers might be encouraged to take out loans for purchases like cars or home improvements, and businesses may invest in expansion since the cost of borrowing is lower. Thus, the answer reflects the expected outcome of a lower discount rate effectively making credit more accessible and less expensive.

When the Federal Reserve lowers the discount rate, it reduces the cost for banks to borrow money from the central bank. As banks find it cheaper to borrow, they are more likely to pass these savings onto consumers and businesses through lower interest rates on short-term loans and credit. This typically leads to a decrease in interest rates for various forms of short-term credit, as the overall cost of borrowing has been reduced.

Lower interest rates on short-term credit can stimulate economic activity by making loans more affordable. Consumers might be encouraged to take out loans for purchases like cars or home improvements, and businesses may invest in expansion since the cost of borrowing is lower. Thus, the answer reflects the expected outcome of a lower discount rate effectively making credit more accessible and less expensive.