ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Moreover, as borrowing increases, the total supply of money in the economy increases. So the end result of lowering interest rates is fewer savings, more money supply, more spending, and higher overall economic activity – a good side effect. On the other hand, lowering interest rates also tend to increase inflation.

Detailed explanation-2: -The Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy.

Detailed explanation-3: -The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

Detailed explanation-4: -Even so, interest rate hikes are known as the central bank’s one major tool to lower inflation, which it does by raising the cost of borrowing money to curb the demand for goods and services. Economists won’t know until later if the Fed’s moves were successful or not.

Detailed explanation-5: -Conducting monetary policy If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.