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When the Federal Reserve lowers the reserve ratio, which lowers the amount of cash banks must keep in reserves, banks are able to offer more discount loans. The correct answer is increasse in reserve requirements.
One way the Federal Reserve can increase the money supply is by lowering the discount rate.When the discount rate is lower, depository institutions are more inclined to borrow, which increases their reserves and lending activity.By changing the discount rate, the Fed can influence the money supply, which in turn can help to stimulate economic activity or help to restrain inflationary pressures. The Fed will encourage banks to increase lending if it reduces the discount rate.If the Fed lowers its discount rate, the funds will be used to make decisions on monetary policy, open market operations, and purchases of or relating to money or the mechanisms employed to supply and transfer funds within an economy.
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