How does adjusting the discount rate affect the economy?

Adjusting the discount rate has a significant impact on borrowing costs for both banks and consumers. The discount rate is the interest rate set by central banks for lending to financial institutions. When the central bank lowers the discount rate, it becomes cheaper for banks to borrow money. As a result, banks typically pass on these lower borrowing costs to consumers in the form of lower interest rates for loans and mortgages. This encourages borrowing and spending by consumers and businesses, which can stimulate economic growth.

Conversely, if the discount rate is increased, the cost of borrowing for banks rises, leading to higher interest rates for consumers. This can have a cooling effect on economic activity, as higher borrowing costs may discourage loans for homes, cars, and business investments.

In contrast, the other choices do not accurately encapsulate the direct effect of adjusting the discount rate. While consumer savings rates may be indirectly influenced by interest rates, they are not the primary focus of the discount rate adjustment. The discount rate does not directly determine exchange rates, as exchange rates are influenced by a variety of factors, including supply and demand for currencies, inflation rates, and economic stability. Additionally, the discount rate does not set the level of government spending, which is primarily determined through legislative processes and fiscal policy