ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Setting a high discount rate tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions. This could be considered a contractionary monetary policy.

Detailed explanation-2: -Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit.

Detailed explanation-3: -Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up.

Detailed explanation-4: -The Federal Reserve controls the three tools of monetary policy–open market operations, the discount rate, and reserve requirements.