A change in the discount rate shifts the supply of reserves.

Question

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The discount rate is the interest rate set by central banks for lending to commercial banks. A change in the discount rate directly affects the cost of borrowing for banks, thereby influencing their willingness to borrow reserves from the central bank. When the discount rate is lowered, borrowing becomes cheaper, potentially increasing the supply of reserves as banks are more inclined to borrow. Conversely, if the discount rate is raised, borrowing becomes more expensive, which could decrease the supply of reserves as banks may be less inclined to borrow.

A Change in the Discount Rate Shifts the Supply of Reserves