ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks’ reserve requirements, the Fed can decrease the size of the money supply.

Detailed explanation-2: -The Federal Reserve can decrease the money supply by increasing the discount rate. a. Increasing the discount rate gives depository institutions less incentive to borrow, thereby decreasing their reserves and lending activity.

Detailed explanation-3: -When the Fed raises the reserve requirement on deposits, the money supply decreases. The reserve requirement is a rule set by the Fed that must be satisfied by all depository institutions, including commercial banks, savings banks, thrift institutions, and credit unions.

Detailed explanation-4: -A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money. The banks pass on higher borrowing costs by raising the rates they charge for consumer loans.