Question

Which of the following Fed actions will increase bank lending? Select one or more answers from the choices shown

 

The Fed lowers the discount rate from 4 percent to 2 percent

The Fed raises the reserve ratio from 10 percent to 11 percent 

The Fed raises the discount rate from 5 percent to 6 percent

The Fed sells bonds to commercial banks

Answer 1

Option A.

• The Fed uses three main monetary policy tools in order to regulate the money supply and bank lendings. They are, discount rate, open market operations and the reserve requirements.
• To increase the bank lendings the money supply within the economy must Increase.
• This happens when the Fed makes some purchases, lowers the discount rate and the reserve requirements.
• Selling of bonds, raising required reserve ratio and discount rate will only decrease the money supply and thereby decrease bank lendings.
• But when the Fed lowers the discount rate from 4 to 2 percent, the banks can give out more loans as they will be having enough reserves left even after giving out the loans.