Question

Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will _________.

Answer 1

Answer:

reserves will be  0.1 billion

Explanation:

given data

discount rate  = 1 %

borrow = $2 billion

reserve ratio = 10%

discount rate= 4.0% to  3.5%

to find out

bank reserves will be

solution

we know here discount rate is  1 % with borrow additional $2 billion and reserve ratio is 10%

and here discount rate is 0.5 % for 4% to 3.5 %

so here we can say bank will borrow $2 billion × 0.5

bank borrow  = $1  billion

and

here bank reserves increase that is 10% ×  $1  billion

so  reserves will be 0.10 ×  $1  billion = 0.1 billion