Asked by Amber Hodge on Jun 12, 2024
Verified
Trace the effects on the money supply when the Fed decreases the discount rate.
Discount Rate
The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.
Money Supply
The overall pool of financial assets in an economy at a given stage.
- Acquire knowledge of how the Federal Reserve influences the amount of money in circulation by operations involving the trade of government securities.
- Interpret the impact of monetary policy tools on the banking sector and the overall economy.
Verified Answer
TH
Termaine HughesJun 14, 2024
Final Answer :
The discount rate represents the cost of bank borrowing from the Fed. When the cost of bank borrowing decreases, banks will increase the amount of borrowing which will create additional reserves. The additional reserves mean banks can make more loans. These new loans end up as deposits by people which increases the amount of money in the economy (through the multiplier effect).
Learning Objectives
- Acquire knowledge of how the Federal Reserve influences the amount of money in circulation by operations involving the trade of government securities.
- Interpret the impact of monetary policy tools on the banking sector and the overall economy.
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