Question

Which of the following Fed actions will increase bank lending? a) The Fed reverse repos $10 billion worth of Treasury bonds to non-bank financial firms. unchecked b) The Fed raises the reserve ratio from 10 percent to 11 percent. unchecked c) The Fed raises the discount rate from 5 percent to 6 percent. unchecked d) The Fed lowers the discount rate from 4 percent to 2 percent.

Answer 1

Answer:

D. The Fed lowers the discount rate from 4 percent to 2 percent.

Answer 2

Answer:

d) The Fed lowers the discount rate from 4 percent to 2 percent.

Explanation:

The federal discount rate is the interest rate charged by central bank to other banks.

The federal discount rate is used as an instrument to control the economy.

A decrease in the discount rate makes it cheaper for commercial banks to borrow money resulting into increased lending activity throughout the economy which is usually part of expansionary monetary policy.

Conversely, a hike in discount rate makes it more expensive for banks to borrow money leading to slowdown of economy which is part of contractionary monetary policy.