Suppose That, for Every 1-Percentage-Point Decline in the Discount Rate

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.