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:

Put Provision

A clause in a bond or other security that allows the holder to force the issuer to buy back the security before its maturity date.

Call Provision

A clause in a bond contract allowing the issuer to repay the bond before its maturity date under specific conditions.

Convertible Bond

A type of bond that the holder can convert into a specified number of shares of the issuing company, usually at predetermined times during its life.