If the Fed were to increase the discount rate so that it was much higher than the federal funds rate,eventually
A) reserves would decrease and the money supply would decrease.
B) reserves would increase and the money supply would increase.
C) reserves would decrease and the money supply would increase.
D) reserves would increase and the money supply would decrease.
E) there is no impact on reserves or the money supply.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the discount rate above the federal funds rate, it becomes more expensive for banks to borrow directly from the Fed. This leads to a decrease in bank reserves as banks are less inclined to borrow, which in turn reduces the money supply since banks have less base to create loans.

If the Fed Were to Increase the Discount Rate So