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

question 1

Multiple Choice

Suppose that, for every 1-percentage-point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to
4) 25 percent, bank reserves will

• A) increase by $0.5 billion and the money supply will increase by $2.5 billion.
• B) decline by $0.5 billion and the money supply will decline by $2.5 billion.
• C) increase by $0.75 billion and the money supply will increase by $3.75 billion.
• D) increase by $1 billion and the money supply will increase by $5 billion.

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Definitions:

Directly Related

A situation where two variables move in the same direction, meaning if one increases, the other also increases and vice versa.

Price Inelastic

Describes a situation where the demand for a good is not significantly affected by changes in its price.

Farm Incomes

The earnings generated from the operation of a farm, including profits from selling agricultural products.

Cross Elasticity

A metric showing how demand for a particular good is affected by changes in the pricing of another good.