When a commercial bank borrows from a Federal Reserve Bank

Question

Quizplus · Accepted Answer

When a commercial bank borrows from a Federal Reserve Bank, it increases its reserves which in turn increases the lending ability of the bank. Therefore, choice C is the correct answer. Choice A is incorrect because borrowing from the Federal Reserve Bank does not automatically increase the supply of money. Choice B is incorrect because borrowing from the Federal Reserve Bank does not necessarily indicate that the commercial bank is unsound financially. Choice D is incorrect because borrowing from the Federal Reserve Bank increases the commercial bank's reserves, it does not reduce them.

When a Commercial Bank Borrows from a Federal Reserve Bank