Answer to Question #150480 in Economics of Enterprise for Hassan Raafat Mohamed

Question

Explain how increased liquidity (easy money) created through Treasury open market operations and changes in the discount rate are supposed to affect interest rates and GDP?

Answer 1

Wnhen the treasury creats increased flow of money as well as high discount rates, it tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions. Interest rates also coordinate savings in the economy, the increase in money supply increases the spending on goods and services hence growing the Gross Domestic Product (GDP)