Which of the following statements BEST describes why an increase in the discount rate often results in a decrease in the money supply?
A) An increase in the discount rate will lower the overall values of loans from the Federal Reserve Banks to individual banks.
B) An increase in the discount rate will lower the overall values of loans from individual banks to other financial institutions.
C) An increase in the discount rate will lower the overall number of banks issuing loans to individuals.
D) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individual banks.
E) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individuals.

Question

Quizplus · Accepted Answer

When the discount rate increases, banks are less likely to borrow from the Federal Reserve Banks, thus decreasing the overall number of loans from the Federal Reserve Banks to individual banks. This in turn reduces the amount of money that individual banks have available to lend, leading to a decrease in the money supply.

Which of the Following Statements BEST Describes Why an Increase