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Commercial bank problems

Select the right answer of the question. Assume that, for every 1-percentage point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also suppose that reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will: A) increase by $.5 billion and the money supply will increase by $2.5 billion. B) decline by $.5 billion and the money supply will decline by $2.5 billion. C) increase by $.75 billion and the money supply will increase by $3.75 billion. D) increase by $1 billion and the money supply will increase by $5 billion.

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