The Federal Reserve increases the discount rate in order to:A.make more treasury securities available for sale.B.encourage banks to increase their prime rates.C.make banks more likely to lend money to customers.D.increase the overall money supply in the economy.
Question
The Federal Reserve increases the discount rate in order to:A.make more treasury securities available for sale.B.encourage banks to increase their prime rates.C.make banks more likely to lend money to customers.D.increase the overall money supply in the economy.
Solution
The Federal Reserve increases the discount rate in order to: B. encourage banks to increase their prime rates.
Here's why:
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility. When the Federal Reserve increases the discount rate, it makes borrowing money from the Fed more expensive for banks.
In response to this, banks often increase their prime rates, which are the rates they charge their most creditworthy customers. This is done to offset the increased cost of borrowing from the Fed. So, an increase in the discount rate can lead to an increase in the prime rates offered by banks.
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