ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -The net effects of raising the discount rate will be a decrease in the amount of reserves in the banking system. Fewer reserves will support fewer loans; the money supply will fall and market interest rates will rise. If the central bank lowers the discount rate it charges to banks, the process works in reverse.

Detailed explanation-3: -Lowering the discount rate gives depository institutions a greater incentive to borrow, thereby increasing their reserves and lending activity. 3. The Federal Reserve can decrease the money supply by increasing the discount rate.

Detailed explanation-4: -When the Fed adjusts the reserve requirement, it allows banks to charge lower interest rates. Banks often take on a financial burden when limits change, so the Fed often uses open market operations instead to influence banks.