Question

question 4 of 10
a central bank would like to stimulate more economic activity. in order to
encourage banks to lend more money, it reduces the cost of taking out short-
term loans from the government.

this action best illustrates the central banks use of which tool of monetary
policy?

a. open market operations

b. discount rate

c. reserve requirements

d. interest on reserves

Explanation:

The discount rate is the interest rate at which commercial banks borrow short-term funds directly from the central bank. Lowering this rate reduces the cost for banks to borrow, incentivizing them to take more loans and lend more to businesses/consumers, which stimulates economic activity. Open market operations involve buying/selling government securities, reserve requirements are the minimum funds banks must hold, and interest on reserves is the rate paid on bank reserves held at the central bank—none of these match the described action.

Answer:

B. Discount rate