Question

What is the third traditional method for conducting monetary policy, and how does it affect the economy?

a) Open market operations that increase the money supply
b) Raising or lowering the discount rate to influence borrowing and the money supply
c) Changing the reserve requirements for banks
d) Altering the federal funds rate directly

Answer 1

The third traditional method for conducting monetary policy is to raise or lower the discount rate. If the central bank raises the discount rate, then commercial banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves. If the central bank lowers the discount rate it charges to banks, the process works in reverse.

Step-by-step explanation:

The third traditional method for conducting monetary policy is to raise or lower the discount rate. If the central bank raises the discount rate, then commercial banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves. Since fewer loans are available, the money supply falls and market interest rates rise. If the central bank lowers the discount rate it charges to banks, the process works in reverse.