ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -A fall in interest rates increases the amount of money people wish to hold, while a rise in interest rates decreases that amount. A change in prices is another way to make the money supply equal the amount demanded. When people hold more nominal dollars than they want, they spend them faster, causing prices to rise.

Detailed explanation-3: -Future cash flows are reduced by the discount rate, so the higher the discount rate the lower the present value of the future cash flows. A lower discount rate leads to a higher present value. As this implies, when the discount rate is higher, money in the future will be worth less than it is today.

Detailed explanation-4: -When the discount rate is raised, it becomes more expensive for commercial banks to borrow money from the Fed. They borrow less of it and also increase the interest rates charged to their customers. Thus, the money supply in the economy reduces when the discount rate is raised.