The word "discount rate," which is primarily used in American English, refers to the interest rate the Fed imposes on depository institutions when they borrow money from the Fed.
Banks will naturally take large loans if they discover they must pay low interest rates in order to lend them to the public and earn returns later. However, when the public takes large loans, the money supply will grow.
Why is it called a discount rate?
When determining the present value of an investment, the discount rate is the rate of return used to discount future cash flows. Because future earnings are less valuable than current earnings, a discount rate is applied to future cash flows.
What does the term "discount rate" mean in terms of monetary policy?
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they get through the discount window of their regional Federal Reserve Bank.
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