Final answer:
When the Fed reduces the discount rate, it generally leads banks to (Option a) borrow more money from the Fed, which can in turn lower market interest rates and increase the money supply.
Step-by-step explanation:
In the context of monetary policy, when the Federal Reserve (the Fed) reduces the discount rate, it influences the borrowing behavior of banks. The discount rate is the interest rate charged by the Fed when banks borrow short-term funds directly from the Federal Reserve. A lower discount rate tends to encourage banks to borrow more money from the Fed because it becomes cheaper to do so. As a result, banks have more reserves and are able to lend more to consumers and businesses, which can lead to a decrease in market interest rates and an increase in the money supply.
It is important to note that in recent decades, the use of the discount window has been less prominent compared to other tools of monetary policy, such as open market operations. Banks are encouraged to borrow from other sources at potentially lower rates, like the federal funds market, before resorting to the discount window. However, the principle that a lower discount rate encourages additional borrowing from the Fed, when utilized, generally still holds.