Final answer:
The rate charged by the Federal Reserve when a member bank borrows from it is called the discount rate. This rate is higher than the federal funds rate to encourage banks to borrow from other sources first. The discount rate is less frequently used now, with open market operations being a more effective monetary policy tool. The correct option is B.
Step-by-step explanation:
The rate that's charged when a member bank borrows from the Federal Reserve is known as the discount rate. This is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility, commonly referred to as the discount window.
The discount rate is purposely set higher than the federal funds rate, which is the rate at which banks lend to each other, to encourage banks to seek alternative sources before turning to the Fed for funds.
The Fed has three different discount window programs: primary credit, secondary credit, and seasonal credit, each with its specific interest rate. The discount rates are established by each Reserve Bank's board of directors, subject to review by the Board of Governors of the Federal Reserve System.
However, it's important to note that in recent times, the Fed has infrequently processed discount loans. Adjusting the discount rate has little direct impact on most banks' borrowing habits because they typically don't borrow extensively at the discount rate. Instead, the Fed has found open market operations to be a more efficient tool in conducting monetary policy.