In recent years, the Fed has generally set the discount rate
A) lower than the federal funds rate to help financially troubled banks get more solvent.
B) higher than the interest rate on 30-year fixed-rate mortgage loans.
C) higher than the federal funds rate for most banks.
D) equal to the rate of inflation.

Question

Quizplus · Accepted Answer

The discount rate is the interest rate at which banks can borrow money directly from the Federal Reserve. In normal circumstances, the discount rate is higher than the federal funds rate, which is the rate at which banks lend and borrow money from each other. Banks that are unable to borrow from other banks often turn to the Fed's discount window for short-term funding, but they must pay a higher interest rate for this privilege. This is done to discourage banks from relying too heavily on the Fed's discount window and to encourage them to borrow from other banks instead.

In Recent Years, the Fed Has Generally Set the Discount