ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Manipulating Interest Rates The first tool used by the Fed, as well as central banks around the world, is the manipulation of short-term interest rates. Put simply, this practice involves raising/lowering interest rates to slow/spur economic activity and control inflation.

Detailed explanation-2: -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-3: -To do this, the FOMC could raise its target range for the federal funds rate (FFR) and increase the administered rates-interest on reserve balances (IORB) rate, overnight reverse repurchase agreement (ON RRP) offering rate, and discount rate-accordingly.

Detailed explanation-4: -The most common monetary policy tool used by the Fed is changing the discount rate. 17. A contractionary or “tight” money policy entails a decrease (or fall in the growth rate of) the money supply, M1, leading to a lower interest rate.