If the Federal Reserve decides to lower the discount rate, how might this action affect a bank's reserve ratio and its ability to lend money?

When the Fed cuts the discount rate, it becomes cheaper for banks to borrow from the Federal Reserve, so banks are more likely to take out discount window loans. The extra money that banks receive shows up as reserves on their balance sheets, raising the amount of reserves they hold. Because the reserve ratio is the ratio of reserves to required deposits, adding reserves while deposits stay the same lowers the ratio. With a lower reserve ratio, the bank has more excess reserves that can be turned into loans, so its lending capacity increases. For example, if a bank had $50 million in deposits and a required reserve of 10 %, a $5 million discount loan would raise reserves to $55 million, dropping the ratio from 10 % to about 9 %, freeing up $5 million for new loans.