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6.2.4 Quiz: Domestic Economic Policy

Question 3 of 10

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 borrowing.



Answer :

GinnyAnswer

Final answer:

The Federal Reserve discount rate impacts the money supply by altering borrowing habits of commercial banks.


Explanation:

The Federal Reserve discount rate affects the money supply by influencing borrowing behavior. When the Federal Reserve raises the discount rate, commercial banks borrow less from the Fed, leading to a reduction in the money supply. Conversely, if the discount rate is lowered, banks borrow more, increasing the money supply.


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