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As the discount rate is decreased, banks shift their source of borrowing from other banks to the Fed. As they do so, the total amount of money in the system is increased. If the spread is positive, banks will always borrow from other banks, this will have no effect on the money supply.
2. Required Reserve Ratio:
The percentage of deposits any bank holds as reserves. The Fed mandates the ratio. When the ratio is decreased, banks are required to hold a lower percentage than reserves and can lend more to their customers, in-turn increasing money supply in the economy. The opposite can occur, causing banks to drain the system due to the decreased money supply...
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