ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the Fed lowers the discount rate, this increases excess reserves in commercial banks throughout the economy and expands the money supply. On the other hand, when the Fed raises the discount rate, this decreases excess reserves in commercial banks and contracts the money supply.

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: -When the discount rate is raised, it becomes more expensive for commercial banks to borrow money from the Fed. They borrow less of it and also increase the interest rates charged to their customers. Thus, the money supply in the economy reduces when the discount rate is raised.