Why does changing the discount rate up or down typically have little impact on a bank's behavior?

• A. The discount rate directly determines the interest rates banks charge their customers.
• B. Banks are required by law to borrow from the central bank whenever the discount rate changes.
• C. Changes in the discount rate immediately alter the reserve requirements for banks.
• D. Banks rarely borrow from the central bank at the discount rate, preferring other sources of funds.

Answer: (D)

Verified step by step guidance

1. Understand the role of the discount rate: It is the interest rate the central bank charges commercial banks for short-term loans.
2. Recognize that banks have multiple sources of funds, such as customer deposits and interbank lending, which are often cheaper or more convenient than borrowing at the discount rate.
3. Note that because banks rarely rely on borrowing from the central bank at the discount rate, changes in this rate do not strongly influence their overall cost of funds.
4. Realize that since the discount rate affects only a small portion of banks' funding, changes in it typically have little impact on the interest rates banks charge customers or on their lending behavior.
5. Conclude that the discount rate is more of a signal or backup source rather than a primary tool that directly controls bank behavior.