Question

A variable like the Fed's discount rate, the rate charged by the federal reserve on borrowed money by banks, is an example of which of the following?

A policy instrument (variable directly under the control of policy makers)

An operating target (variable that responds immediately to policy instrument)

An intermediate target (variable that responds to a change in policy that is subject to a lag)

A policy goal (long-run objective)

Answer 1

A policy instrument (variable directly under the control of policy makers)

Step-by-step explanation:

The Fed's discount rate is a monetary policy tool used to expand or contract the money supply.

When the Fed lowers the discount rate, it is engaging in an expansionary monetary policy which will increase the money supply, lower interest rates and increase total aggregate demand.

When the Fed raises the discount rate, it is engaging in a contractionary monetary policy which will decrease the money supply, increase interest rates and fight rising inflation.