Economics Questions

Re: Why does a lowering of the discount rate cause inflation?

TheOrlonater — Sat, 06 Jun 2009 23:35:39 GMT

Not to mention the pyramiding.

Re: Why does a lowering of the discount rate cause inflation?

krazy kaju — Thu, 04 Jun 2009 23:36:31 GMT

Remember that price is the regulator of supply and demand. A lower price means that people are willing and able to buy more of something. An interest rate is a price on credit. Credit is another form of money. Thus, when the Fed lowers the discount rate, banks are more able and most likely more willing to borrow from the Fed. This new money then circulates in the economy, causing rising prices.

Re: Why does a lowering of the discount rate cause inflation?

onebornfree — Thu, 04 Jun 2009 12:58:14 GMT

Glitch:

Why does a lowering of the discount rate cause inflation?

It does not, necessarily.

Re: Why does a lowering of the discount rate cause inflation?

DD5 — Wed, 03 Jun 2009 16:06:56 GMT

The discount rate is nothing but a "valve" on one method of the credit creation process. The interest rate between the Fed and the banks is not a real "rate" in the sense that it brigs the demand and supply into equilibrium. The Fed has no real supply (savings) of its own, and the demand is artificially induced by the Fed's lowering of interest rates.

Instead of the Fed saying, I am willing to create this amount of more "credit out of thin air" for the banks, the Fed is talking about interest rates that in practice must be always lower then the ongoing loan rate, so that it is profitable for the bank to "borrow" for the sake of lending. In practice, I don’t know how much new money is injected into the system by this method, in comparison to open market operations by the Fed. I think this process is usually accompanied by open market transactions that the press usually doesn't cover.

Why does a lowering of the discount rate cause inflation?

Glitch — Wed, 03 Jun 2009 13:39:41 GMT

Why does a lowering of the discount rate cause inflation?

My insight into the matter is that banks essentially feel more liberal in there borrowing because they dont have to worry about paying the FED back high interest if they go over there reserve requirement.