What is the discount rate for a momentary self?

Expert Solution

Answer : The discount rate is an interest rate. The Central Bank charge an interest rate on Commercial Banks and other financial institutions for borrowing reserves. So, the Central Bank's charged interest rate on Commercial Banks and other financial institutions for borrowing reserves is called discount rate.

The Central Bank use this discount rate to maintain the money supply of economy. If the Central Bank want to increase the money supply in the economy then the Central Bank decrease the discount rate. As a result, the Commercial Banks and other financial institutions borrow more reserves and lend more which increase the money supply in the economy.

If the Central Bank want to decrease the money supply in the economy then the Central Bank increase the discount rate. As a result, the Commercial Banks and other financial institutions borrow less reserves as the cost of borrowing increases. This decrease the lending amount which decrease the money supply in the economy.

Rahul Sunny answered 2 months ago

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