If the Fed increases the discount rate, it is pursuing
A) a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy.
B) a contractionary policy because it reduces banks' profit margins by raising the cost of borrowing and lowering the return on lending.
C) an expansionary policy because it raises the cost of holding excess reserves in the banking system.
D) an expansionary policy because it increases bank profits by putting upward pressure on the interest rates that banks can charge on its loans.

Question

Quizplus · Accepted Answer

When the Fed increases the discount rate, it makes it more expensive for banks to borrow funds from the Fed. This, in turn, puts upward pressure on interest rates in the economy, making it more expensive for businesses and individuals to borrow money. This contractionary policy is used to slow down economic growth and keep inflation in check.

If the Fed Increases the Discount Rate, It Is Pursuing