When the Fed increases the discount rate, it:
A)increases the reserve-deposit ratio (rr).
B)decreases the reserve-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 Fed increases the discount rate, it becomes more expensive for banks to borrow money from the Fed. This means that banks will be less likely to borrow and will hold onto more of their reserves, which decreases the monetary base. Therefore, the correct answer is D.

When the Fed Increases the Discount Rate, It