Which sentence best completes the diagram? The Federal Reserve
decreases the discount rate.
A. Banks decrease their prime rate.
B. The Open Market Committee buys treasury securities.
C. Banks increase their prime rate.
D. The Open Market Committee sells treasury securities.

The correct option is A: Banks decrease their prime rate.

Explanation:

When the government through the Federal Reserve ups the discount rate, other rates tend to follow in the same direction. The reverse is also true.

The discount rate is the rate at which the Federal Reserve lends to Commercial Banks. Commercial banks on the other hand, in order to keep the profit, are forced to adjust their prices in the direction of the discount rate.

The prime rate is the rate at which commercial banks lend to their customers who have very good credit ratings.

The discount rate in economics is one of the monetary policy tools available for use by the government. It is used to adjust factors such as money supply and inflation.

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