Why does raising the discount rate affect the money supply for?

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2026-03-04 00:45

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Raising the discount rate increases the cost of borrowing for banks, making them less likely to take loans from the central bank. As banks reduce their borrowing, they have less capacity to lend to businesses and consumers, which in turn decreases the overall money supply in the economy. This tightening of credit can lead to higher interest rates, further discouraging borrowing and spending, thus slowing economic activity.

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