QuestionAugust 1, 2025

What happens to the money supply if the Fed raises the discount rate? it decreases it increases it increases, and then decreases

What happens to the money supply if the Fed raises the discount rate? it decreases it increases it increases, and then decreases
What happens to the money supply if the Fed raises the discount rate? it decreases it increases it increases, and then decreases

Solution
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Answer

it decreases Explanation 1. Understand the Discount Rate The discount rate is the interest rate charged by central banks on loans to commercial banks. 2. Effect of Raising the Discount Rate When the Fed raises the discount rate, borrowing becomes more expensive for banks. 3. Impact on Money Supply Higher borrowing costs lead to reduced borrowing by banks, decreasing the money supply.

Explanation

1. Understand the Discount Rate<br /> The discount rate is the interest rate charged by central banks on loans to commercial banks.<br /><br />2. Effect of Raising the Discount Rate<br /> When the Fed raises the discount rate, borrowing becomes more expensive for banks.<br /><br />3. Impact on Money Supply<br /> Higher borrowing costs lead to reduced borrowing by banks, decreasing the money supply.
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