ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -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-3: -Key Takeaways Central banks cut interest rates when the economy slows down in order to reinvigorate economic activity and growth. Rates go up when the economy is hot. The goal of cutting rates is to reduce the cost of borrowing so that people and companies are more willing to invest and spend.

Detailed explanation-4: -A decrease in the discount rate makes it cheaper for commercial banks to borrow money, which results in an increase in available credit and lending activity throughout the economy.

Detailed explanation-5: -Answer and Explanation: When the Fed increases the discount rate, it will give less money to banks and thus the supply of money will shift left. This is because a higher discount rate makes it more expensive for banks to borrow from the Fed.