The reason that the Fed does not actively use discount rate policy to control the money supply is because the Fed
A)acts when a majority of member banks agree on policy and the banks rarely agree.
B)earns interest on discounting and cannot afford to lose the revenue.
C)does not know how banks will respond to discount rate changes.
D)has been directed by Congress to set the discount rate at a permanent level.

Question

Quizplus · Accepted Answer

The Fed does not actively use discount rate policy to control the money supply because it is difficult to predict how banks will respond to changes in the discount rate. Banks may not borrow from the Fed even if the discount rate is lowered or may borrow excessively if the discount rate is too low, making it challenging for the Fed to control the money supply through discount rate policy. The other options are incorrect because the Fed does not need a majority of member banks to agree on policy (A), earns a relatively small amount of revenue from discounting (B), and is not directed by Congress to set the discount rate at a permanent level (D).

The Reason That the Fed Does Not Actively Use Discount