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:

Net Price

The price that a distributor will charge a customer after any trade discounts have been subtracted from the list price.

Discount Method

A financing or accounting method where interest and other finance charges are subtracted from the loan amount before the borrower receives funds.

Complement Rates

The relationship between two rates where the sum totals a certain whole, often used in contexts like complementary angles or probability.

Equivalent Single Discount

A single, consolidated discount rate that is equivalent in value to a series of multiple discounts applied successively.