What will happen in the money market if the Federal Reserve decreases the discount rate?Multiple choice question.Banks borrow more from the Fed and make more loans, causing the money supply to increase.Banks borrow less from the Fed and make fewer loans, causing the money supply to decrease.Banks borrow more from the Fed and make more loans, causing the money supply to decrease.Banks borrow less from the Fed and make fewer loans, causing the money supply to increase.
Question
What will happen in the money market if the Federal Reserve decreases the discount rate?Multiple choice question.Banks borrow more from the Fed and make more loans, causing the money supply to increase.Banks borrow less from the Fed and make fewer loans, causing the money supply to decrease.Banks borrow more from the Fed and make more loans, causing the money supply to decrease.Banks borrow less from the Fed and make fewer loans, causing the money supply to increase.
Solution
The correct answer is: Banks borrow more from the Fed and make more loans, causing the money supply to increase.
Here's why:
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The discount rate is the interest rate charged by the Federal Reserve to commercial banks for loans.
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When the Federal Reserve decreases the discount rate, it becomes cheaper for banks to borrow money from the Fed.
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As a result, banks are likely to borrow more money from the Fed because it's less expensive to do so.
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Banks then have more money available to lend to their customers.
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This increase in lending activity effectively increases the overall supply of money in the economy.
So, when the Federal Reserve decreases the discount rate, it typically leads to an increase in the money supply because banks borrow more from the Fed and make more loans.
Similar Questions
How does the Federal Reserve discount rate affect the money supply?A.The Federal Reserve raises the rate in order to encourage banks to lend less.B.The Federal Reserve charges consumers less in order to discourage borrowing.C.The Federal Reserve charges consumers more in order to discourage borrowing.D.The Federal Reserve lowers the rate in order to encourage banks to lend less.SUBMITarrow_backPREVIOUS
Which of the following is not a result of raising the discount rate?Select the correct answer below:Borrowing money from the Fed decreases.Market interest rates rise.The money supply falls.Banks extend more loans to individuals and firms.
The Federal Reserve increases the discount rate in order to:A.make more treasury securities available for sale.B.encourage banks to increase their prime rates.C.make banks more likely to lend money to customers.D.increase the overall money supply in the economy.
How does the Fed lower the Federal Funds rate?Select the correct answer below:The Fed buys securities on the open market and increases the money supply.The Fed buys securities on the open market and decreases the money supply.The Fed sells securities on the open market and increases the money supply.The Fed sells securities on the open market and decreases the money supply.
What is the effect when the Federal Reserve increases interest rates?Responsesthe cost of taking out loansthe cost of taking out loansconsumers spend more in the economyconsumers spend more in the economythe government receives a large increase in tax revenuethe government receives a large increase in tax revenuesudden inflation causes the prices of goods and services to go up
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