Question

When the central bank decides to increase the discount rate, the:?

Answer 1

Increasing the central bank's discount rate leads to a decrease in commercial banks' borrowing from the central bank, resulting in a reduction of the money supply and a rise in market interest rates as part of monetary policy.

Step-by-step explanation:

When the central bank decides to increase the discount rate, it affects commercial banks by discouraging them from borrowing reserves from the central bank. Instead, these commercial banks may call in loans to replenish their reserves, leading to a reduction in the overall availability of loans. As a result, the money supply contracts and market interest rates tend to rise. This is a method of conducting monetary policy that directly impacts the economy by controlling the lending capacity of commercial banks.

In recent periods, however, the Federal Reserve has seldom made discount loans, and most banks prefer other borrowing sources before resorting to the Federal Reserve's discount window. While changing the discount rate has become a less predominant tool in impacting banking behavior, it remains a significant symbol of the direction of the Federal Reserve's monetary policy. Particularly, open market operations have emerged as a more effective tool for achieving desired monetary outcomes.

Answer 2

If the Central Banks decides to increase the discount rate. Then the commercial banks are less likely to borrow from the federal reserves. The Central Bank has the authority to increase and decrease discount rates in order to monitor the inflation rates of money as well as the prices of basic commodities