ECONOMICS
FEDERAL RESERVE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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lower the discount rate.
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sell securities on the open market.
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increase the reserve requirement for banks.
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require banks to hold a reserve for all types of deposits.
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Detailed explanation-1: -If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.
Detailed explanation-2: -Increasing interest rates does not increase a nation’s money supply because the two have an inverse relationship. Higher interest rates translate to a lower supply of money in the economy.
Detailed explanation-3: -When the discount rate is raised, it becomes more expensive for commercial banks to borrow money from the Fed. They borrow less of it and also increase the interest rates charged to their customers. Thus, the money supply in the economy reduces when the discount rate is raised.
Detailed explanation-4: -The discount rate is typically set higher than the federal funds rate target, usually by 100 basis points (1 percentage point), because the central bank prefers that banks borrow from each other so that they continually monitor each other for credit risk and liquidity.