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What is discount window? How (and when) it is related to the money supply in the economy?


What is discount window? How (and when) it is related to the money supply in the economy? Explain max. in 5 sentences.

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A discount window is a mechanism that allows banks to borrow from the central bank for a short term basis usually to meet liquidity requirements. Discount window consists primarily of three types ; a primary credit, secondary credit and seasonal credit. Discount window is a tool used by the Fed to control money supply. In case the Fed intends to reduce the money supply in the economy it will increase the discount rate and vice versa.

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