n 7 What is the discount rate What happens to the money supp

n 7. What is the discount rate? What happens to the money supply when the Fed raises the discount 7? rate? 8. What are reserve requirements? What happens to y the money supply when the Fed raises reserve requirements?

Solution

Ans7) discount rate is the interest rate on the loans that the Fed makes to banks. Banks are discouraged fo borrow from the fed, when there are higher rates. Quantity of reserves in the banking system is reduced when there is increase in the discount rate and further money supply is reduced.

Ans8) reserve requirements are regulations on the minimum amount of reserves that makes must hold against deposits. Banks hold more reserves to increase the reserves meaning loaning out less of each dollar that is deposited. This lowers the money multiplier, decreases the money supply raises the reserve ratio.