Question

The discount rate refers to which tool of monetary policy?

1) the ability to change the cost banks have to pay to borrow money
2) the ability to adjust interest rates for investors who purchase stocks
3) the ability to buy and sell government securities in the open market
4) the ability to control the reserve requirements for banks

Answer 1

The discount rate is the interest rate charged by the central bank to commercial banks for loans and is a tool to change the borrowing cost for banks, influencing the money supply and market interest rates.

Step-by-step explanation:

The discount rate refers to one of the tools of monetary policy utilized by a central bank, specifically the interest rate charged by the central bank on loans it extends to commercial banks. It represents tool number one: the ability to change the cost banks have to pay to borrow money.

The central bank has three traditional tools: open market operations (buying and selling government bonds), reserve requirements (regulating the amount of funds banks must hold in reserve), and changing the discount rate. The discount rate is crucial because it influences the cost of borrowing for banks and, by extension, affects the money supply and overall market interest rates.