Asked by Kattelin Crocker on May 21, 2024
Verified
A decrease in the discount rate ____ both total and excess reserves and ____ the money supply.
A) increases;decreases
B) decreases;increases
C) decreases;decreases
D) increases;increases
Discount Rate
The interest rate charged by central banks on loans to commercial banks or the rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.
Excess Reserves
The amounts of cash banks hold in their vaults or deposit at the central bank which exceed the regulatory requirements.
Money Supply
The entire financial capacity of an economy, taking into account cash, coins, and the amounts in both checking and savings accounts, at a specific point in time.
- Learn about the consequences of actions taken by the Federal Reserve on the determination of interest rates and investment spending.
- Identify and distinguish between the different tools the Federal Reserve uses to control the money supply.
Verified Answer
NS
Nicoy SmithMay 23, 2024
Final Answer :
D
Explanation :
A decrease in the discount rate makes it cheaper for banks to borrow money from the central bank, which increases both total and excess reserves. This, in turn, allows banks to lend more, thereby increasing the money supply.
Learning Objectives
- Learn about the consequences of actions taken by the Federal Reserve on the determination of interest rates and investment spending.
- Identify and distinguish between the different tools the Federal Reserve uses to control the money supply.