When the central bank in an economy raises the refinancing rate it encourages commercial banks to reduce their lending, thereby tending to reduce the money supply.

Question

Quizplus · Accepted Answer

When the central bank raises the refinancing rate, it becomes more expensive for commercial banks to borrow money from the central bank. As a result, commercial banks may reduce their lending to businesses and individuals, leading to a reduction in the money supply.

When the Central Bank in an Economy Raises the Refinancing