What Are the Factors That Would Influence the Federal Reserve in Adjusting the Discount Rate?

* What are the factors that would influence the Federal Reserve in adjusting the discount rate?

The discount rate is the interest rate charged to banks for brrowing money from the Fed to loan to the consumers of the bank. The Fed can adjust this rate to either discourage or encourage the banks from seeking a loan. The decrease will encourage and the increase will discourage just the same as interest rates effect borrowing in the private sector. The more the banks are able to loan the more money is in circulation and the more growth is able to happen. The main factores used to decide to adjust the rate up or down is based on the Real GDP, the inflation rate, and the unemployment rate. These rates are effected in different ways by the amount of money out in circulation. Real GDP increases and decreases along with the money supply. This is because of the increase in consumer demand and investments when the economy is doing well. However this could in time lead to inflation when there is to much money in the economy. This causes prices to rise as well. Unemployment goes up and down along with Real GDP. The less money available for growth the less jobs are made available and the more expansion the more job opportunities. If the Fed needs to adjust how much money is in the economy the discount rate is one way to do so.

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

The discount rate is how much the bank will owe for the loan in interest. The goal will then be to adjust their individual interest rates accordingly to pay off the loan and the intrest with profit. The applicant credit score also effects the loan. The higher the credit score the lower the intrest and the lower the crediot score the higher the interest. This also means that if the adjusted rate is high banks are not only going to have higher intrest rates but they are also going to qualify fewer people for loans.

* How does monetary policy aim to avoid inflation?

A contracturay policy leads to deflation. This is done by lowering the money supply. This is done by adjusting the discount rate, reserve requirments, and open market operations.

* How does monetary policy control the money supply?

Monetary policy is used to control the money supply through the msnipulation of the the discount rate, reserve requirments, and open market. This can also be done through the purchasing and selling of government bonds. When the Fed buys these government bonds it increases the money supply and when it sells them it decreases the money supply.

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