Question

Why is it that a decrease in the discount rate does not normally lead to an increase in borrowed reserves? Use the supply and demand analysis of the market for reserves to explain.

Short answer

A decrease in the discount rate does not normally lead to an increase in borrowed reserves.

Step-by-step solution

Concept Introduction

A lessening in the rebate rate doesn't ordinarily prompt an expansion in acquired holds on the grounds that the harmony financing cost normally still falls beneath.

Explanation

A lessening in the rebate rate doesn't ordinarily prompt an expansion in acquired holds on the grounds that the harmony financing cost normally still falls beneath the markdown rate.

Decline in the markdown rate prompts an expansion in the interest for cash and subsequently, it prompts an expansion in cash supply which decreases the financing cost.

Explanation

In any case, that diminished loan fee is still not exactly the markdown rate. It implies the loan fee is underneath the rebate rate which commercial banks need to pay to took care of. Profit is not exactly the borrowings. Because of this interest for acquired saves lessens.

Final Answer

A lessening in the rebate rate doesn't ordinarily prompt an expansion in acquired holds on the grounds that the harmony financing cost normally still falls beneath the markdown rate.