Question

The Federal Reserve uses monetary tools to regulate the money supply and maintain growth and stability in the U.S. economy. One of these tools is the adjustment of the discount rate it charges financial institutions on loans from the Federal Reserve. Identify whether each of the Effects stems from increasing or decreasing the discount rate Column A Column B

1 )People buy more houses a Decrease
2) People pay more for loans
b. Increase
3) Inflation increases Next Page Back

Answer 1

1. Increasing the discount rate charged by the Federal Reserve leads to people buying fewer houses and paying more for loans, 2. while decreasing the discount rate has the opposite effects. 3. Additionally, increasing the discount rate can potentially lead to an increase in inflation.

Step-by-step explanation:

Analyzing the impact of adjustments in the Federal Reserve's discount rate necessitates an examination of their consequences on financial institutions and the overall money supply.

An elevation in the discount rate prompts reduced borrowing by financial entities from the Federal Reserve, prompting a contraction in the money supply and an elevation in market interest rates.

Conversely, a reduction in the discount rate induces heightened borrowing from the Federal Reserve, expanding the money supply and diminishing market interest rates.

The repercussions extend to individual behavior, particularly in the housing market.

A discount rate hike elevates the cost of borrowing, dissuading individuals and businesses from taking out loans to purchase houses, consequently reducing housing transactions.

Simultaneously, an increased discount rate translates to higher interest rates on loans, escalating the financial burden on borrowers.

Moreover, altering the discount rate can impact inflation dynamics; a decreased rate encourages increased borrowing, expanding the money supply and potentially fostering inflation as more currency circulates within the economy.