ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Fed wants to encourage banks to loan out more of their money, it may reduce the discount rate, making it easier or cheaper for banks to borrow money if their reserves fall too low. Reducing the discount rate causes banks to lend out more money, which increases the money supply.

Detailed explanation-2: -Tighter monetary policy, like an increase in the cash rate, typically dampens spending and inflation. If inflation is likely to be too high (low) for too long, the Reserve Bank Board would typically tighten (loosen) monetary policy, such as by increasing (decreasing) the cash rate.

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: -Discount Rate If the Fed wants to give banks more reserves, it can reduce the interest rate it charges, thereby inducing banks to borrow more. Alternatively, it can soak up reserves by raising its rate and persuading the banks to reduce borrowing.