The discount rate is the interest rate on loans that the Federal Reserve makes t

Question

The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A higher discount rate banks' incentives to borrow reserves from the Federal Reserve, thereby the quantity of reserves in the banking system and causing the money supply to . The federal funds rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Federal Reserve uses open-market operations to buy government bonds, the quantity of reserves in the banking system , banks' demand for borrowed reserves , and the federal funds rate .

Explanation / Answer

Higher discount rate reduces incentives to borrow from the Fed. It reduces the quantity of reserves the the system casing the money supply to contract. Fed buying bonds causes reserves in the system to increase, lessening the demand for borrowed reserves and causing the Federal funds rate to decrease.

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