ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Because they were worried about rising inflation
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Because they were worried about too much unemployment
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Either A or B
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None of the above
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Detailed explanation-1: -Adjusting the discount rate allows central banks such as the Fed to reduce liquidity problems and the pressures of reserve requirements, control the supply of money in the economy and basically assure stability in the financial markets.
Detailed explanation-2: -An increase in the discount rate makes it less profitable for banks to borrow from the Federal Reserve. As banks reduce their borrowing, the total reserves of the banking system are reduced and the quantity of money supplied by the banking system declines.
Detailed explanation-3: -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.
Detailed explanation-4: -Answer and Explanation: When the Fed increases the discount rate, it will give less money to banks and thus the supply of money will shift left. This is because a higher discount rate makes it more expensive for banks to borrow from the Fed.