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When the Fed increases the discount rate so that it is much higher than the federal...

When the Fed increases the discount rate so that it is much higher than the federal funds rate, eventually

reserves decrease and the money supply decreases.

reserves increase and the money supply increases.

reserves decrease and the money supply increases.

reserves increase and the money supply decreases.

there is no impact on reserves or the money supply.

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Answer #1

Ans- reserves decrease and the money supply decreases.

Explanation- when the Fed raises the discount rate, this decreases excess reserves in commercial banks and contracts(Decreases) the money supply.

The discount rate is the interest rate charged when member banks borrow directly from the Fed. All banks are required to set aside a certain proportion of their deposits in reserve, according to the reserve ratio set by the Federal Reserve.

A higher discount rate means it's more expensive for banks to borrow funds, so they have less cash to lend.The Fed raises the discount rate when it wants all interest rates to rise known as contractionary monetary policy it is used by the central banks to fight inflation.

This is the complete process how it works.

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