When a member bank borrows reserves from the Fed,
A) it pays an interest rate called the discount rate.
B) it pays no interest rate but is required to repay the loan within the stipulated period.
C) it pays an interest rate equivalent to the coupon rate on long-term government bonds.
D) it pays an interest rate equal to the federal funds in the reserves market.

Question

Quizplus · Accepted Answer

When a member bank borrows reserves from the Fed, it pays an interest rate called the discount rate. This rate is set by the Federal Reserve and is usually higher than the federal funds rate, which is the interest rate at which banks lend reserves to each other overnight. The discount rate is one of the tools that the Fed uses to control the money supply and stabilize the economy.

When a Member Bank Borrows Reserves from the Fed