Question

NSERT YOUR ANSWERS UNDER EACH QUESTION – FIVE LINES MAXIMUM

1. Using the tools at its disposal, describe how the Federal Reserve might: 1) INcrease the lending power of banks and 2) DEcrease the lending power of banks. Be specific in answering both parts of the question.

Answer 1

The supply of the money in the economy is regulated by the central bank of the country through expansionary and monetary policies.

• Expansionary Monetary policies the supply of the money increased during deflation.Lowering CRR, reducing Bank Rate, Open market Operation this way lending capacity of the commercial banks

• The contractionary monetary policy the supply of money decreased during inflation time by adopting following tools rising CRR, increasing Bank Rate, Open market operations, which reduce the lending capacity of the commercial bank.