Under which of the following circumstances would the Federal Reserve System want to increase the money supply by increasing the discount rate?
A) The economy is experiencing severe inflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
B) The economy is experiencing severe inflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity.
C) The economy is experiencing severe deflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
D) The economy is experiencing severe deflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity.
E) The economy is experiencing wild fluctuations, and most financial institutions have low M-1 resources at their disposal.

Question

Quizplus · Accepted Answer

A) The Fed helps counteract inflation by decreasing the money supply. By increasing the discount rate, the Fed is discouraging further loans from itself and encouraging the institutions to use their own funds for investment.

Under Which of the Following Circumstances Would the Federal Reserve