Question

Through the use of one monetary policy tool, describe how the monetary multiplier functions in the economy of the United States.

A) The discount rate affects the monetary multiplier by influencing the lending practices of banks, thereby impacting the overall money supply.
B) Open market operations influence the monetary multiplier by regulating government spending, thereby controlling the money supply.
C) Reserve requirements impact the monetary multiplier by determining the amount of money banks can lend, affecting the money supply in the economy.
D) Interest rates influence the monetary multiplier by affecting consumer spending and investment, thereby controlling the money supply.

Answer 1

The discount rate affects the monetary multiplier by influencing the lending practices of banks, thereby impacting the overall money supply in the US economy.

Step-by-step explanation:

The monetary policy tool that affects the monetary multiplier in the economy of the United States is the discount rate. When the central bank, known as the Federal Reserve (Fed), raises the discount rate, commercial banks reduce their borrowing of reserves from the Fed and instead call in loans to replace those reserves. This leads to a decrease in the money supply and an increase in market interest rates. Conversely, when the Fed lowers the discount rate, commercial banks borrow more reserves from the Fed, resulting in an increase in the money supply and a decrease in market interest rates.