The discount rate is the interest rates on loans that the Federal Reserves makes banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A higher discount rate (increases or decreases) banks' incentives to borrow reserves from the Federal Reserve, thereby________ (increasing or reducing) the quantity of reserves in the banking system and causing the money supply to________ (fall or rise).

The federal funds rate is the interest rate that banks charge one another for short-term ________(typically overnight) loans. When the Federal Reserve uses open-market operations to buy govenment bonds, the quantity of reserves in the banking system ________(decreases or increases), banks' demand for borrowed reserves (declines or rises), and the federal funds rate________ (increases or decreases).