ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Monetary policy is a set of tools used by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.

Detailed explanation-2: -Key Takeaways The Fed discount rate is set by the Fed’s board of governors, and can be adjusted up or down as a tool of monetary policy. Lending at the discount rate is part of the Fed’s function as a lender of last resort, and is one of the Fed’s primary monetary policy tools.

Detailed explanation-3: -The reserve requirement is another tool that the Fed has at its disposal to control liquidity in the financial system. By reducing the reserve requirement, the Fed is executing an expansionary monetary policy, and conversely, when it raises the requirement, it’s exercising a contractionary monetary policy.

Detailed explanation-4: -A bank is at liberty to hold in reserve sums above this minimum requirement, commonly referred to as excess reserves. The reserve ratio is sometimes used by a country’s monetary authority as a tool in monetary policy, to influence the country’s money supply by limiting or expanding the amount of lending by the banks.

Detailed explanation-5: -The discount rate is the interest rate at which commercial banks and other depository institutions can borrow reserves from regional Federal Reserve Banks to facilitate short-term adjustments to temporary changes in the structure of their assets and liabilities.