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Explain how a decrease in the discount rate affects credit availability and the money supply.

Explain how a decrease in the discount rate affects credit availability and the money supply.

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Decrease in the discounting rate will be leading to cheaper rate for the commercial bank to borrow and it will mean that when there will be a cheaper rate for the commercial bank to borrow, they will be borrowing more and it would be leading to a higher ability of these banks to lend this money to borrowers and Hence, this will be leading to a high degree of credit availability in the economy and this will also mean that there would be a very high liquidity into the economy leading to higher money supply.

This is an example of quantitative easing by Federal Reserve through which discount rate is decreased in order to boost the demand into the economy and increase the overall credit availability and growth into the economy which will be leading to increase in the money supply.

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