- If the Federal Reserve announces that it will decrease the interest rate by 0.25 percentage points, what will happen to the money supply? Explain the process that leads to the lower interest rate. In particular, mention what actions the Federal Reserve takes and what is the effect of those actions. Show the short-run effect of such policy decision in a real business cycle model. What happens in the long-run if the policy is permanent? What if it is temporary?
- Firms get the money they need to undertake large investment from three main channels: loans from banks, issuing bonds and issuing stocks. The first two are categorized as debt, while the last one is part of equity. What is the fundamental difference between debt and equity?
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