Final answer:
An increase in the discount rate reduces the supply of credit, affecting loan availability and interest rates.
Explanation:
An increase in the discount rate reduces the supply of credit and therefore increases the real interest rate.
When the discount rate is higher, banks hold more excess reserves, lending out a smaller fraction of their deposits, resulting in a shift inward in the supply of credit. This leads to a decrease in the overall supply of bank reserves.
The Federal Reserve can influence interest rates by adjusting the discount rate, with higher rates leading to decreased loan availability and higher interest rates.
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