When the Fed increases the discount rate, it:
A) increases the reserve to deposit ratio (rr).
B) decreases the reserve to deposit ratio (rr).
C) is likely to increase the monetary base (B)
D) is likely to decrease the monetary base (B).

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the discount rate, it makes borrowing more expensive for banks. This typically leads to a decrease in the monetary base (B) because banks are less inclined to borrow reserves from the Fed, reducing the overall amount of reserves in the banking system.

When the Fed Increases the Discount Rate, It