If the Federal Reserve wants to discourage banks from borrowing directly from the Federal Reserve and thus decrease the monetary base, it will likely:

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the discount rate, it makes it costlier for banks to borrow directly from it. This discourages banks from borrowing from the Federal Reserve, which in turn reduces the monetary base. Option B is incorrect because increasing the federal funds rate encourages banks to borrow from the Federal Reserve. Option C is incorrect because increasing the reserve requirement also increases the cost of lending for banks, which might actually encourage lending from the Federal Reserve. Option D is incorrect because selling U.S. Treasury bills in an open market operation does not directly impact the discount rate or borrowing from the Federal Reserve.

If the Federal Reserve Wants to Discourage Banks from Borrowing