ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Is a Discount Window? The discount window is a central bank lending facility meant to help commercial banks manage short-term liquidity needs. Banks that are unable to borrow from other banks in the fed funds market may borrow directly from the central bank’s discount window paying the federal discount rate.

Detailed explanation-2: -As described in more detail below, depository institutions have access to three types of discount window credit from their regional Federal Reserve Bank: primary credit, secondary credit, and seasonal credit, each with its own interest rate ("discount rate").

Detailed explanation-3: - decrease; temporarily 31) Discount loans to banks experiencing severe liquidity problems are called secondary credit. 32) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called primary credit.

Detailed explanation-4: -The discount rate is typically set higher than the federal funds rate target, usually by 100 basis points (1 percentage point), because the central bank prefers that banks borrow from each other so that they continually monitor each other for credit risk and liquidity.