ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the Fed wants to curb inflation, it can increase the discount rate, which makes it more expensive for banks to lend or for businesses and individuals to borrow. This curbs the money supply and decreases inflation, but it can also slow down economic activity.

Detailed explanation-2: -Because raising or lowering the discount rate alters the banks’ borrowing costs and hence the rates that they charge on loans, adjustment of the discount rate is considered a tool to combat recession or inflation.

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: -Deregulation of energy, housing and other markets would reduce the regulatory burden on businesses, lowering the cost of domestic production and bringing down prices.