ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Fed wants to give banks more reserves, it can reduce the interest rate it charges, thereby inducing banks to borrow more. Alternatively, it can soak up reserves by raising its rate and persuading the banks to reduce borrowing.

Detailed explanation-2: -The Fed policy lowers the discount rate, which means banks have to lower their interest rates to compete for loans. As a result, expansionary policies increase the money supply, spur lending, and boost (expand) economic growth-which also increases inflation.

Detailed explanation-3: -By raising or lowering the discount rate, the Fed can influence the money supply, which can fuel economic activity or help control inflationary pressures. If the Fed lowers the discount rate, it encourages banks to lend more money (since they can increase their reserves at a lower cost).

Detailed explanation-4: -Conducting monetary policy 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.