How does the discount rate affect the money supply quizlet?

How does the discount rate affect the money supply quizlet?

To increase money supply, Fed can lower discount rate, which encourages banks to borrow more reserves from Fed. Banks can then make more loans, which increases the money supply. To decrease money supply, Fed can raise discount rate.

How do changes in interest rates affect the money supply?

The Fed can also alter the money supply by changing short-term interest rates. Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, and so the Fed must be careful not to lower interest rates too much for too long.

What does the discount rate affect?

Setting a high discount rate tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions. This could be considered a contractionary monetary policy.

What causes discount rates to change?

Adjusting for Inflation Inflation occurs when the demand for goods and services outpaces the supply. Businesses raise prices and take out loans to increase production. To adjust for this imbalance, the Federal Reserve raises the discount rate with the goal of taking money out of circulation to cut demand.

What happens to the money supply if the Fed lowers the discount rate quizlet?

When the Fed reduces the discount rate, it encourages banks to borrow, therefore increasing bank reserves and money supply to the economy. The aggregate demand shifts to the right because it helps with economic growth.

What is the discount rate Economics quizlet?

The discount rate refers to the interest rate on loans the Fed makes to banks.

How does discount rate affect present value?

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

Is it better to have a higher or lower discount rate?

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.

Why would a discount rate decrease?

During a slow economy, the Fed encourages growth in the economy and the money supply by reducing reserve requirements and lowering the discount rate. This normally encourages banks to lower the rates they charge on loans, which increases borrowing.

What happens when the discount rate increases?

A higher discount rate means it’s more expensive for banks to borrow funds, so they have less cash to lend. This Fed policy lowers the discount rate, which means banks have to lower their interest rates to compete. Expansionary policies increase the money supply, spurs lending, and boosts economic growth.

How does a lower discount rate affect the money supply?

Reducing the discount rate will make available funds for lending, since the cost of acquiring it has reduced. Investors, will borrow more since the lending rates are attractive. Hence the money supply inbthe economy will increase.

Why does the Fed charge a discount rate?

The discount rate is the interest rate that the Fed charges banks that want to borrow money from it. The interest rate that the Fed charges then affects the interest rates that banks themselves charge. The interest rate that banks charge is, in essence, the price that people and firms must pay to borrow money from the banks.

How can the Fed affect the money supply by using the?

So by raising or lowering the discount rate, the Fed can basically force banks to keep more money in reserve, which lowers the amount of money in circulation—the money supply. It can do the opposite by lowering the discount rate.

Why does the Central Bank raise the discount rate?

In order to bring the economy back into balance, the central bank has the option of raising the discount rate, causing inflation to cool down while restoring the balance between supply and demand. Let’s summarize what we’ve talked about in this lesson.