In the context of monetary policy, which of the following statements is true of the discount rate?
A)The Fed increases it during recessions.
B)When the cost of acquiring funds from the Fed is low, interest rates on bank loans tend to fall.
C)When the Fed increases it, banks can obtain funds at a lower cost.
D)It is the interest rate that the Fed charges on its loans to individuals.

Question

Quizplus · Accepted Answer

The discount rate is the interest rate at which banks can borrow money from the Federal Reserve. When the discount rate is low, banks can borrow funds at a lower cost which reduces the interest rates on bank loans. Option A is incorrect because the Fed reduces the discount rate during recessions to encourage banks to lend more. Option C is incorrect because an increase in the discount rate leads to an increase in the cost of borrowing for banks. Option D is incorrect because the Federal Reserve does not lend to individuals.

In the Context of Monetary Policy, Which of the Following