ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fed raises the discount rate when it wants other interest rates to rise. This is called contractionary monetary policy, and central banks use it to reduce inflation. This policy also reduces the money supply and slows lending, which slows (contracts) economic growth.

Detailed explanation-2: -The Fed discount rate is set by the Fed’s board of governors, and can be adjusted up or down as a tool of monetary policy. Lending at the discount rate is part of the Fed’s function as a lender of last resort, and is one of the Fed’s primary monetary policy tools.

Detailed explanation-3: -To expand the money supply, the Fed would reduce the discount rate. The discount rate is the interest rate the Fed charges banks that borrow from it. A lower discount rate makes it more incentive for banks to borrow from it; all the money banks adopt from the Fed are excess reserves.

Detailed explanation-4: -In short, the Fed adjusts two administered rates, interest on reserve balances and ON RRP, to keep the federal funds rate within the target range determined by the FOMC. And the Fed adjusts the discount rate to serve as a ceiling.