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:

Recessions

Periods of economic decline when GDP falls consecutively for two or more quarters, typically characterized by reduced spending and increased unemployment.

Stagflation

An economic situation characterized by prolonged high inflation combined with high unemployment and stagnant demand in a country's economy.

Depression

A severe and prolonged downturn in economic activity, characterized by significant decline in gross domestic product, high unemployment, reduced consumer spending, and deflation.

Inflation

The rate of increase in the average cost of goods and services, which results in a decrease in the value of money.