Final answer:
Tje correct answer is option 1. A decrease in GDP would lead to a reduction in the equilibrium interest rate because economic slowdowns often result in central banks cutting rates to encourage borrowing and investment.
Step-by-step explanation:
The question concerns the conditions that lead to a decrease in the equilibrium interest rate in the economy. To understand the dynamics behind interest rate changes, one must consider the relationship between supply and demand in the financial market. An increase in the supply of money, ceteris paribus, would lead to a decrease in the interest rates, as the competition among lenders to find borrowers would intensify.
Looking at the options provided:
- A decrease in GDP typically leads to lower interest rates, as economic slowdowns often prompt central banks to cut rates to stimulate borrowing and investment.
- An increase in the price level, or inflation, could push the central bank to increase interest rates to combat inflation.
- An open market sale of securities by the Fed (Federal Reserve) is an action used to decrease the money supply, which would typically increase interest rates, not decrease them.
- An increase in the discount rate is a tool used by the Federal Reserve to decrease banks' borrowing and thereby decrease the money supply, often leading to an increase in interest rates.
Therefore, among the provided options, the scenario that would lead to a decrease in the equilibrium interest rate is a decrease in GDP.