When the Fed Increases the Discount Rate, Banks

question 33

Multiple Choice

When the Fed increases the discount rate, banks

• A) must purchase more government securities.
• B) must pay a higher rate when they borrow from the Fed.
• C) will lower the rate they charge to borrowers.
• D) must hold a greater amount of funds in reserve against deposits.

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Definitions:

WACC

The Weighted Average Cost of Capital; a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.

Cost of Capital

The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile.

Division A

A segment or branch of a company that operates independently with its own set of management and objectives but is still legally tied to the parent corporation.

Division B

Generally refers to a specific unit or section within a larger organization, allocated for managing a particular set of tasks or responsibilities.