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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Explain how to use the discount rate to expand the money supply.

To determine

To state: the way discount rate is used to expand the supply of money.

Explanation

The Federal Reserve System is basically the central bank of the USA engaged in making decisions regarding money supply. It not only decides whether to lower or raise interest rates and, influence macroeconomic policy but also regulates the nation’s banking system to insure the health of the bank’s balance sheet and protect bank depositors.

One of the most important functions of ‘The Fed’ is to conduct the monetary policy of the nation. To achieve this, the central bank implements the three traditional tools such as Open Market Operations, Changing reserve requirements, and Changing the discount rate.

Changing the discount rate: At the time ofbank runs, even healthy banks borrow funds from the Fed...

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