ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the money supply increases
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the money supply decreases
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Either A or B
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None of the above
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Detailed explanation-1: -If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required to keep less cash on hand and are able to increase the number of loans to give consumers and businesses. This increases the money supply, economic growth and the rate of inflation.
Detailed explanation-2: -A decrease in the discount rate makes it cheaper for commercial banks to borrow money, which results in an increase in available credit and lending activity throughout the economy.
Detailed explanation-3: -An increase in the discount rate makes it less profitable for banks to borrow from the Federal Reserve. As banks reduce their borrowing, the total reserves of the banking system are reduced and the quantity of money supplied by the banking system declines.
Detailed explanation-4: -Open Market Operations has an impact on interest rates because when the Fed buys bonds, prices rise and interest rates decrease; when the Fed sells bonds, prices fall and rates go up.