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The Federal Reserve

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What are the factors that would influence the Federal Reserve in adjusting the discount rate?
The factors that influence the Fed adjusting the discount rate tie closely with whatever monetary policy is in place. Since the discount rate is the interest rate at which the Fed loans money to banks, an expansionary policy would lower the discount rate increasing money supply where as an increased discount would raise interest rates and contract the money supply.

How does the discount rate affect the decisions of banks in setting their specific interest rates?

The discount rate effects the decisions of banks in setting their specific rates by the discount rate acting as the indicator of ease at which the banks are able to borrow from the central bank. For instance, if the discount rate is lower, that means banks are able to borrow from the Fed more easily and since the banks are able to borrow more easily, their rates will be lower at which the lend to the average person.

How does monetary policy aim to avoid inflation?

The monetary policy that is used to avoid inflation is the contractionary monetary policy. This policy raises interest rates which decrease the amount of money being spent in the economy. When the amount of money being spent is decreased, the decreases consumer spending which eventually lowers the price of goods or at least slows down the rise in prices of goods.

How does monetary policy control the money supply?

Monetary policy controls the money supply by either raising or lowering interest rates. When interest rates are raised (contractionary) money supply is decreased. When interest rates are lowered (expansionary) money supply is decreased.

How does a stimulus program (through the money multiplier) affect the money supply?

A stimulus program affects the money supply by temporarily slashing interest rates in order to increase...

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