How does the discount rate affect the economy

Define the discount rate. Tell who can raise the discount rate. Explain how raising the discount rate leads to a reduction in the money supply.
Subject
Economics

Question Description
(5 points)

Score

3

1. Define the discount rate. Tell who can raise the discount rate. Explain how raising the discount rate leads to a reduction in the money supply.

In banking the discount rate refers to the interest rate charged to commercial banks and some other depository institutions for loans received from Federal Reserve Bank discount window. In finance the discount rate refers to interest rate used in discounted cash flow analysis to determine the present value or future cash flow.The discount rate can be raised by the Federal Reserve Bank.

The Federal Reserve affect the money supply via the discount rate as the amount of lending that goes on in the economy will change accordingly. Discount rate affects the commercial interest rates and therefore has an impact on the loans issuance and money supply.

PLEASE ANSWER THIS ADDITIONALY What happens when discount rate is raised?

(5 points)

Score

5

1. Describe a stock market bubble. Explain what causes a bubble, and why a crash generally follows a bubble.

Stock market bubble is a sort of economic bubble in stock markets occurring when market participants drive stock prices above their value according to a particular stock valuation.

A stock bubble is caused by an economic cycle, with a rapid expansion occurring and followed by a contraction. The crash is generally followed by a bubble since the investors are too eager to sell off and at some point the prices are not justified by the value.