ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the central bank wants more money circulating into the economy, it can reduce the reserve requirement. This means the bank can lend out more money. If it wants to reduce the amount of money in the economy, it can increase the reserve requirement.

Detailed explanation-2: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.

Detailed explanation-3: -If the central bank raises the discount rate, then commercial banks will reduce their borrowing of reserves from the Fed, and instead borrow from the federal funds market, or for more serious needs, call in loans to replace those reserves.

Detailed explanation-4: -When the Fed raises the reserve requirement on deposits, the money supply decreases. The reserve requirement is a rule set by the Fed that must be satisfied by all depository institutions, including commercial banks, savings banks, thrift institutions, and credit unions.

Detailed explanation-5: -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.