Which interest rate is set by the Federal Reserve that member banks are charged when borrowing money?

The discount rate is the interest rate set by the Federal Reserve at which member banks can borrow funds directly from the Federal Reserve Bank. This borrowing typically occurs when banks need to meet reserve requirements or manage liquidity. By adjusting the discount rate, the Federal Reserve can influence lending and borrowing behaviors, ultimately impacting the overall economy.

The discount rate serves as a tool for monetary policy, allowing the Federal Reserve to control the money supply and influence economic activity. When the discount rate is lowered, borrowing becomes cheaper for banks, encouraging them to lend more money to consumers and businesses. Conversely, raising the discount rate makes borrowing more expensive, which can help cool down an overheated economy.

The other choices relate to interest rates but in different contexts or applications. The market rate refers to the prevailing interest rates available in the open market, while the prime rate is the interest rate banks charge their most creditworthy customers. The federal funds rate is the interest rate at which banks lend to each other overnight, which is influenced by the discount rate but distinct from it.