ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -This is the correct option because due to discount policy, many factors get affected, and the most important factors are borrowed reserves and the monetary base.

Detailed explanation-2: -An increase in the discount rate makes it less profitable for banks to borrow from the Federal Reserve. As banks reduce their borrowing, the total reserves of the banking system are reduced and the quantity of money supplied by the banking system declines.

Detailed explanation-3: -The factors effecting monetary base are-Reserve of central bank, bank deposit and treasury currency or securities such as bond. When new fresh funds are created by the Federal Reserve to buy bonds from commercial banks then the bank holding of money increases. This influence the monetary base to expand.

Detailed explanation-4: -The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility-the discount window.

Detailed explanation-5: -The Federal Reserve can increase the money supply by lowering the discount rate. a. Lowering the discount rate gives depository institutions a greater incentive to borrow, thereby increasing their reserves and lending activity.