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

Multiple Choice

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 ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to
4) 25 percent, bank reserves will

A) increase by $0.5 billion and the money supply will increase by $2.5 billion.
B) decline by $0.5 billion and the money supply will decline by $2.5 billion.
C) increase by $0.75 billion and the money supply will increase by $3.75 billion.
D) increase by $1 billion and the money supply will increase by $5 billion.