The money supply increases when the Fed
A)lowers the discount rate.The increase will be larger the smaller the reserve ratio is.
B)lowers the discount rate.The increase will be larger the larger the reserve ratio is.
C)raises the discount rate.The increase will be larger the smaller the reserve ratio is.
D)raises the discount rate.The increase will be larger the larger the reserve ratio is.

Question

Quizplus · Accepted Answer

When the Fed lowers the discount rate, it encourages banks to borrow from the Fed, which increases the reserves that banks have available to lend. Banks can then create more loans, which increases the money supply. The increase in the money supply will be larger the smaller the reserve ratio is because banks will be able to lend out a larger proportion of their reserves.

The Money Supply Increases When the Fed