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 requirement is 20%. If the Fed increases the discount rate from 4.0% to 4.25%, bank reserves will ________.
A. increase by $0.75 billion and the money supply will increase by $3.75 billion
B. increase by $1 billion and the money supply will increase by $5 billion
C. decline by $0.5 billion and the money supply will decline by $2.5 billion
D. increase by $0.5 billion and the money supply will increase by $2.5 billion
Answer: C
Economics
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