Question

When the Fed decreases the discount rate, banks will a. borrow less from the Fed and lend more to the public. The money supply increases. b. borrow less from the Fed and lend less to the public. The money supply decreases. c. borrow more from the Fed and lend less to the public. The money supply decreases. d. borrow more from the Fed and lend more to the public. The money supply increases.

Answer 1

Answer:

d. borrow more from the Fed and lend more to the public. The money supply increases.

Explanation:

The Federal Reserve System (popularly referred to as the 'Fed') was created by the Federal Reserve Act, passed by the U.S Congress on the 23rd of December, 1913. The Fed began operations in 1914 and just like all central banks, the Federal Reserve is a United States government agency.

Generally, it comprises of twelve (12) Federal Reserve Bank regionally across the United States of America, which are commonly referred to as Federal Reserve District Bank.

Like all central banks, the Federal Reserve is a government agency that is saddled with the following responsibilities;

I. The Fed controls the issuance of currency in United States of America: it promotes public goals such as economic growth, low inflation, and the smooth operation of financial markets.

II. It regulates banking activities in the United States of America: it has the power to supervise and regulate banks.

III. It provides banking services to all the commercial banks in the country because the Federal Reserve is the "lender of last resort."

When the Federal Reserve System (Fed) decreases the discount rate on the money it lends to commercial banks, it would spur the banks to borrow more from the Fed and as a result, lend more money to the general public. Consequently, the money supply or currency in circulation increases.