A central bank would like to stimulate more economic activity. In order to encourage banks to lend more money, it reduces the cost of taking out short term loans from the government. Which monetary policy used by a central bank does this best describe?

The discount rate

Explanation:

The central bank adopts a variety of operations under its monetary policy to regulate the adequate flow of cash in the economy. It primarily includes four operations; interest on reserves, discount rates, open-market operations, and reserve requirements. The central bank each of these elements of monetary policy to increase or decrease the money supply to control the situation of inflation or deflation in the economy.

As per the question, the reduction of cost of taking out for short-term loans from the government would be characterized as the 'reduction in discount rate' element of the monetary policy as the central bank has increased the discounts to encourage the banks to lend higher amount and increase the money supply.

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