The central bank of the United States the federal reserve has many tools it can use to affect the credit market . In class we discussed the role of the policy rate. In July the Fed increased the policy rate from 5.15% to 5.4%. Discuss how this will affect the interest rates that a representative household will face and how that will affect their borrowing (or lending ) decisions. Use the term bank lending rate . The following graph shows a constrained choice problem for a household with an investment opportunity where their initial wealth is $100 today. If they make the investment they will receive a 50% return and they can borrow at a 10% rate . Explain what the points D and E imply about the household's optimal choice