Multiple Choice QuestionWhen the Federal Reserve wants to encourage economic activity, it will ______ the discount rate.Multiple choice question.eliminatedecreaseextendincrease
Question
Multiple Choice QuestionWhen the Federal Reserve wants to encourage economic activity, it will ______ the discount rate.Multiple choice question.eliminatedecreaseextendincrease
Solution
When the Federal Reserve wants to encourage economic activity, it will decrease the discount rate.
Here's why:
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. When the Federal Reserve decreases the discount rate, it essentially makes borrowing cheaper for banks.
This encourages banks to borrow more, which in turn allows them to lend more to businesses and consumers. This increased lending can stimulate spending and investment, which can then boost economic activity.
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