ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Federal Reserve raises interest rates, it means the money supply starts to deplete. A lower amount of money in the economy makes it more expensive to borrow for banks and consumers.

Detailed explanation-2: -When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy, which tends to make the dollar stronger. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.

Detailed explanation-3: -The Fed can also alter the money supply by changing short-term interest rates. By lowering (or raising) the discount rate that banks pay on short-term loans from the Federal Reserve Bank, the Fed is able to effectively increase (or decrease) the liquidity of money.

Detailed explanation-4: -The discount rate is the interest rate on loans that the Federal Reserve makes to banks. If the Fed raises the discount rate, banks will borrow less from the Fed, so both banks’ reserves and the money supply will be lower.