Suppose the Fed wants to indirectly lower short-term interest rates in the hope that consumption and investment will rise. Furthermore, suppose that at this time the interest rate on bank loans is 4 percent, the federal funds rate is 5 percent, and the current federal funds rate target range is 5.25 - 5.50 percent. If the Fed lowers the federal funds rate target range to 3.00 - 3.25 percent, will it bring down short-term interest rates and (assuming that consumption and investment are sensitive to changes in the interest rate) cause consumption and investment to rise? a. Before this question can be answered, we must know what the current discount rate is. b. Yes, because if the Fed lowers the federal funds rate target range to 3.00 - 3.25, it's likely that the federal funds rate will eventually trade in the range of 4.00 - 4.25 percent (it will settle somewhere between 4.00 to 4.25 percent). Then, the federal funds rate, the IOR rate, and the ON-RRP rate will be above the bank loan rate of 4 percent. Consequently, banks would rather use their reserves to create new loans earning 4 percent than to place those reserves in the federal