The Fed has three options for increasing the money supply: lowering the discount rate, buying government bonds, or reducing the minimum reserve ratio. Simple deposit multiplier increases with decreasing necessary reserve ratio.
What Does lowering the reserve requirement reduce the discount rate?
- Banks must extend more loans if the Fed is to expand the amount of money in circulation.
- In order to encourage banks to lend more money, the Fed can choose among three options.
- Reduced reserve needs may result from it. The discount rate may be lowered.
- In order to increase the amount of loans that banks can provide to individuals and businesses, the Federal Reserve must reduce the reserve ratio.
- When this occurs, banks are no longer required to retain as much cash in reserves. As a result, the economy grows and the amount of money in the country increases.
- The amount of the monetary multiplier and the excess reserves kept by commercial banks will both drop as the reserve ratio rises, which will result in a reduction in the money supply.
To Learn more About discount rate refer to:
https://brainly.com/question/9841818
#SPJ4
