The Discount Rate
Banks often borrow money from each other to smooth their day-to-day needs for cash (liquidity). These loans are made and repaid within a day. The rate at which banks borrower overnight is the federal funds rate. If a bank cannot borrow on this private market, it can borrow from the Fed.
The rate at which the Fed will lend (Lender of Last Resort) is the Discount Rate. When the Fed lowers the rate more banks will borrow, and the money supply will increase. When the Fed raises the rate, less borrowing will occur and the money supply will contract.
(Note** the Fed uses Open Market Operations to influence the Federal Funds Rate)
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