ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When banks get to borrow from the central bank at a lower rate, they pass these savings on by reducing the cost of loans to their customers. Lower interest rates tend to increase borrowing, and this means the quantity of money in circulation increases.

Detailed explanation-2: -The Discount Rate and Monetary Policy 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-3: -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. 3.

Detailed explanation-4: -If the Fed lowers the discount rate, it encourages banks to lend more money (since they can increase their reserves at a lower cost). The result is more loans for businesses and consumers, meaning an increase in the money supply, which spurs economic activity but also leads to greater inflation.

Detailed explanation-5: -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.