If the Fed is generous in its granting of discount loans during a crisis,
A)the result will likely be a contraction of the money supply.
B)risk taking by banks and corporations may be encouraged.
C)the discount rate will be bid up as the demand for loans exceeds the supply.
D)market interest rates will rise sharply.

Question

Quizplus · Accepted Answer

If the Fed is generous in its granting of discount loans during a crisis, it may encourage risk-taking by banks and corporations as they are able to acquire funds more easily. This could lead to an increase in lending and investment, potentially boosting economic activity. However, this could also lead to moral hazard and a higher likelihood of future financial instability. The other choices (A, C, and D) are not likely outcomes of a generous discount loan policy.

If the Fed Is Generous in Its Granting of Discount