What is the effect of increasing the discount rate on money supply?

Increasing the discount rate leads to a decrease in the money supply because it makes borrowing from the central bank more expensive for financial institutions. As the cost of borrowing rises, banks are less likely to take loans, which reduces the amount of money they can lend out to consumers and businesses.

When the discount rate is increased, banks tend to tighten their lending policies, which subsequently decreases the amount of money circulating in the economy. This action is often taken as a measure to combat inflation or stabilize the economy by controlling the amount of money available for spending. Therefore, an increase in the discount rate effectively reduces the money supply, aligning with the correct answer.