The discount rateis the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lowerdiscount rate______ banks' incentives to borrow reserves from the Federal Reserve, thereby_______ the quantity of reserves in the banking system and causing the money supply to_______.

The federal funds rateis the interest rate that banks charge one another for short-term (typically overnight) loans. When the Federal Reserve uses open-market operations to buygovernment bonds, the quantity of reserves in the banking system__________ , banks' need to borrow from each other___________ , and the federal funds rate__________ .