ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fed can change the discount rate to try to change the money supply. Suppose the Fed lowers the discount rate. That makes it cheaper for banks to borrow from the Fed if they need reserves. So if banks lend out too much of their reserves and need to get more, they can do so cheaply by borrowing from the Fed.

Detailed explanation-2: -Increasing the discount rate causes banks to lend out less money, which leads to a decrease in the money supply.

Detailed explanation-3: -The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy.

Detailed explanation-4: -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-5: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.