MANAGEMENT

Detailed explanation-1: -Increasing the discount rate gives depository institutions less incentive to borrow, thereby decreasing their reserves and lending activity. 4.

Detailed explanation-2: -The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility-the discount window.

Detailed explanation-3: -The Fed policy lowers the discount rate, which means banks have to lower their interest rates to compete for loans. As a result, expansionary policies increase the money supply, spur lending, and boost (expand) economic growth-which also increases inflation.

Detailed explanation-4: -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.