Question

define the discount rate. explain how raising the discount rate leads to a reduction in the money supply

Answer 1

The interest rate at which a central bank lends money to commercial banks is called discount rate.

A commercial bank lends money to the general public which increases the money supply in the economy. To fulfill its needs, a commercial bank borrows money from central bank.  

Therefore, if central bank lends money at higher discount rate lower will be the borrowing by commercial banks, eventually lower will be the lending to the general public hence money supply declines in the economy.