What is the discount rate?

• A. The rate banks pay when they borrow from households.
• B. The rate charged by the central bank on loans to commercial banks.
• C. The rate on government securities.
• D. The interest rate the Fed charges on loans to banks.

Answer: (D)

The discount rate is the interest rate the Fed charges on loans to banks. This is how the central bank provides liquidity to depository institutions when they need short-term funding. It helps influence how readily banks borrow from the Fed and, in turn, how much lending they extend to households and businesses. It is not the rate at which banks borrow from households or the rate on government securities, and it is separate from the rate banks charge each other for overnight funds.