In the context of monetary policy, what happens when the discount rate decreases?

When the discount rate decreases, it becomes less expensive for banks to borrow money from the central bank. This reduction in the cost of borrowing incentivizes banks to take out loans from the central bank, as they can obtain funds at a lower interest rate. As a result, banks are more likely to increase their lending activities to businesses and consumers.

This increased lending effectively promotes a higher money supply in the economy, as banks can lend out more money than they have on deposit. The additional loans create a multiplier effect, enhancing liquidity and stimulating economic activity. Thus, the decrease in the discount rate serves as a tool for the central bank to encourage borrowing and spending, which can be particularly important during economic downturns when it is crucial to boost demand.