If the Fed Makes a Discount Loan of $2 Million

question 89

Multiple Choice

If the Fed makes a discount loan of $2 million to a commercial bank, the Fed's balance sheet will show

• A)an increase in discount loans of $2 million and an increase in bank reserves of $2 million.
• B)an increase in discount loans of $2 million and a decrease in bank reserves of $2 million.
• C)a decrease in discount loans of $2 million and an increase in bank reserves of $2 million.
• D)a decrease in discount loans of $2 million and a decrease in bank reserves of $2 million.

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Definitions:

Months

Periods into which a year is divided, each consisting of roughly 30 to 31 days, except for February which has 28 or 29 days.

Compounded Monthly

Interest that is calculated on the principal and the accumulated interest of previous periods on a monthly basis.

Loan

Money lent to a borrower, which is expected to be paid back with interest.

Interest Rate

The fraction of a loan billed as interest to the borrower, commonly expressed as a yearly percentage of the remaining loan amount.