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Terms in this set (10) A decrease in the Discount Rate is an indication that monetary policy is contractionary. False.
A decline in the Discount Rate signals that the Fed wants to loosen monetary policy and send a signal to banks that they would like banks to increase their lending activity.
What happens when the Fed lowers the discount rate?
When the Fed lowers the discount rate, this increases excess reserves in commercial banks throughout the economy and expands the money supply.
On the other hand, when the Fed raises the discount rate, this decreases excess reserves in commercial banks and contracts the money supply
When the Fed reduces the discount rate banks will have to obtain funds at a higher cost?
In the context of monetary policy, when the Fed reduces the discount rate, banks will have to obtain funds at a higher cost.
Deflation refers to a period of falling average prices across an economy, which is a sign of economic trouble that goes hand-in-hand with very high unemployment.
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