HISET Social Studies Practice

What is meant by the term 'Discount Rate'?

1. The average interest rate across all banks

2. The minimum interest rate set by the Federal Reserve for lending to other banks

3. The rate at which consumers can borrow

4. A savings account interest rate

The correct answer is: The minimum interest rate set by the Federal Reserve for lending to other banks

The term 'Discount Rate' refers specifically to the minimum interest rate set by the Federal Reserve (or central bank) for lending to other banks, which directly influences the cost of borrowing for banks. It plays a crucial role in monetary policy, as changes to the discount rate can impact the overall economy. When the Federal Reserve changes the discount rate, it can affect interest rates across the economy, including those that consumers and businesses face. By raising or lowering the discount rate, the Fed can either encourage or discourage borrowing and spending, which can help manage economic growth and inflation. Understanding the context is important because while the average interest rate across all banks, the rate at which consumers can borrow, or a savings account interest rate may reflect broader economic conditions, they do not directly define the operational mechanism of the discount rate. The discount rate specifically pertains to interbank lending, making it a vital tool in monetary policy and banking operations.