What is the discount rate and how does changing it affect the money supply?

What will be an ideal response?

The discount rate is the interest rate the Fed charges when it makes short term loans to banks. Borrowing from the Fed increases a bank’s reserves, increasing their lending ability and thus increasing the money supply. An increase in the discount rate makes this kind of borrowing more expensive for banks, decreasing the demand for loan able funds from the Fed and decreasing the money supply. The opposite is true if the discount rate lowers, making it cheaper to borrow from the Fed and increasing the demand for the Fed’s loan able funds. This will ultimately increase the money supply.