Question

Increasing the discount rate can influence the economy by:

Answer 1

Answer:

C. discouraging businesses from borrowing money from banks.

Explanation:

The discount rate is the interest rate imposed on commercial banks when they borrow from the Federal Reserve ( the Fed). The banks borrow from the Fed to meet their short-term cash flow requirements. The discount rate is usually higher than the inter-banks rate (the Fed funds rate).  An increase in the discount rate automatically pushes the inter-bank rate higher.

The interest rate that commercial banks charge their customer for loans is pegged on the Fed funds rate, which is also the inter-bank rate. An increase in the discount rate will translate to a rise in the bank's interest rates for loans.  Businesses and household will reduce their appetite for credit when interest rates go up.  A high discount rate is a deterrent to borrowing from the banks.