Learning Path
Question & Answer
Choose the Best Answer
It would decrease the reserve ratio and increase lending capacity.
It would increase the reserve ratio and decrease lending capacity.
It would have no effect on the reserve ratio or lending capacity.
It would decrease the reserve ratio but have no effect on lending capacity.
Understanding the Answer
Let's break down why this is correct
When the Fed cuts the discount rate, banks can borrow cheaper from the Fed. Other options are incorrect because Some think lowering the discount rate forces banks to keep more reserves, but it actually makes borrowing cheaper, so banks keep fewer reserves; It is easy to guess that changing the discount rate has no effect, but the lower borrowing cost changes the bank’s balance sheet.
Key Concepts
Commercial Bank Reserves
medium level question
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Deep Dive: Commercial Bank Reserves
Master the fundamentals
Definition
Commercial Bank Reserves involves understanding how banks manage their reserves, including required reserves and excess reserves. This topic is crucial in determining a bank's capacity to lend and its adherence to reserve requirements set by regulatory authorities.
Topic Definition
Commercial Bank Reserves involves understanding how banks manage their reserves, including required reserves and excess reserves. This topic is crucial in determining a bank's capacity to lend and its adherence to reserve requirements set by regulatory authorities.
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