Question

the federal reserve increases the discount rate in order to:
a. increase the overall money supply in the economy.
b. encourage banks to increase their prime rates.
c. make more treasury securities available for sale.
d. make banks more likely to lend money to customers.

Explanation:

The discount rate is the interest rate the Federal Reserve charges commercial banks for short-term loans. Raising this rate makes borrowing from the Fed more expensive for banks. To offset this higher cost, banks typically increase their own prime lending rates (the rate they charge their most creditworthy customers).

• Option A is incorrect: a higher discount rate reduces the money supply, not increases it.
• Option C is incorrect: changing the discount rate is unrelated to the supply of treasury securities.
• Option D is incorrect: higher borrowing costs for banks make them less likely to lend to customers, not more.

Answer:

B. encourage banks to increase their prime rates.