An increase in the amount of discount loans by the Fed
A)increases the money supply by an amount equal to the increase in the loans times the multiplier.
B)decreases the money supply by an amount equal to the increase in the loans times the multiplier.
C)decreases the money supply by an amount greater than the increase in the loans times the multiplier.
D)increases the money supply by an amount lower than the increase in the loans times the multiplier.

Question

Quizplus · Accepted Answer

When the Fed increases the amount of discount loans, it is essentially injecting money into the banking system. This increase in reserves allows banks to create more loans and thus increases the money supply. The amount of the increase in the money supply will be equal to the increase in loans times the money multiplier. Therefore, the correct answer is A, which states that the money supply will increase by an amount equal to the increase in the loans times the multiplier.

An Increase in the Amount of Discount Loans by the Fed