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).