If the Fed raises the discount rate, what happens to reserves and the money supply?
A) Reserves increase and the money supply decreases.
B) Both increase.
C) Reserves decrease and the money supply increases.
D) Both decrease.

Question

Quizplus · Accepted Answer

When the Fed raises the discount rate, banks are less likely to borrow from the Fed and more likely to hold onto their reserves, causing a decrease in reserves. With fewer reserves available, the money supply decreases as well.

If the Fed Raises the Discount Rate, What Happens to Reserves