Other things constant, if the Fed decreased the discount rate,
A) the earnings of the Fed would increase.
B) the incentive of commercial banks to borrow from the Fed would be reduced.
C) borrowing from the Fed will tend to increase and the money supply will tend to expand.
D) borrowing from the Fed will tend to decrease and the money supply will tend to decline.

Question

Quizplus · Accepted Answer

The discount rate is the rate at which commercial banks can borrow from the Federal Reserve. If the discount rate is decreased, it becomes cheaper for banks to borrow from the Fed. This would encourage banks to borrow more, increasing borrowing from the Fed and expanding the money supply. Choice A is incorrect because the Fed does not earn profits from setting discount rates. Choice B is incorrect because lower discount rates would provide more incentive for banks to borrow from the Fed. Choice D is incorrect because if the discount rate is reduced, borrowing from the Fed would tend to increase, not decrease.

Other Things Constant, If the Fed Decreased the Discount Rate