Which of the following statements describes how banks have historically used the discount window?
A) They use it sparingly, because using it often signals that a bank is in financial trouble.
B) They use it often, because it provides banks with instant access to needed funds.
C) They use it often, because its low interest rate can serve as a source of profit for banks.
D) They use it only during times of economic boom, when there is a high demand for loans.

Question

Quizplus · Accepted Answer

Historically, banks have used the discount window sparingly because using it frequently would signal that a bank is in financial trouble and could lead to a loss of confidence in the bank from its depositors and investors. Therefore, banks typically turn to other sources of funding, such as interbank borrowing or issuing commercial paper, before resorting to the discount window.

Which of the Following Statements Describes How Banks Have Historically