Suppose That, for Every 1-Percentage-Point Decline in the Discount Rate

question 267

Multiple Choice

Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to
3) 5 percent, bank reserves will

• A) increase by $1 billion and the money supply will increase by $5 billion.
• B) decline by $1 billion and the money supply will decline by $10 billion.
• C) increase by $1 billion and the money supply will increase by $10 billion.
• D) increase by $10 billion and the money supply will increase by $100 billion.

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Definitions:

Participants

Individuals who take part in a particular process, study, or event.

Confounded

Confusion or a mix-up, especially in experimental results, caused by unexpected variables affecting the outcome.

Experimenter Bias

A form of bias introduced by the expectations or beliefs of the experimenter affecting the outcomes of an experiment.

Flinch

A quick, involuntary movement or draw back, often from fear or pain.