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12 October, 01:29

How does the Federal Reserve discount rate affect the money supply?

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  1. 12 October, 02:38
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    Answer: When the Fed lowers the discount rate, this increases excess reserves in commercial banks throughout the economy and expands the money supply. On the other hand, when the Fed raises the discount rate, this decreases excess reserves in commercial banks and contracts the money supply.
  2. 12 October, 03:39
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    The Federal Reserve raises the rate in order to encourage banks to lend less.
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