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Fed changes discount rates

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What happens to interest rates in the economy when the Fed changes the discount rate? Why?

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Solution Summary

The response discusses the implications of Fed changing discount rates.

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Monetary policy is a policy regulated by country's central bank. There are three tools of monetary policy: open market operations, changes in reserve requirements, and changes in the discount rate. Central bank can expand the money supply by:
? Reducing the discount rate
? Reduction in reserves requirements
? Purchasing the Bonds
Central bank can contract the money supply by:
? Increasing the discount rate
? Increasing reserves requirements
? Selling the Bonds

(Cliffnotes, 2009)

Let us take the case of Fed changing the discount rate. This rate has some effect on other market interest rates, but there is no ...

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