How effective is discount policy as compared to open market operations in managing the money supply? Explain how The Federal Reserve uses discount policy today
What will be an ideal response?
The effectiveness of discount policy in changing the money supply depends upon banks' willingness to borrow reserves. The Fed may lower the discount rate of interest, encouraging bankers to borrow reserves and increase loans. But bankers are not required to increase their borrowing. In contrast, an open market purchase of securities will increase reserves in the banking system and encourage lending. The Fed prefers to limit the use of discount policy to help banks that are temporarily in need of reserves. That is, the Fed uses the policy to serve as a lender of last resort for banks. It did so after the stock market crash in 1987 and after the terrorist attacks on September 11, 2001.
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If a bank customer deposits $100 in cash, and the bank lends $90 of that deposit to another customer by crediting $90 to her account:
A. the money supply has increased by $190. B. the money supply has increased by $90. C. the money supply has decreased by $10. D. the money supply has not changed.
Which of the following explains why long-run average total cost at first decreases as output increases?
a. diseconomies of scale b. less efficient use of lumpy inputs c. fixed costs become spread out over more units of output d. gains from specialization of inputs e. marginal costs rise at a slower rate than average costs in the short run