Suppose that the Federal Reserve makes a $10 million discount loan to First Nati

Question

Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank (FNB) by increasing FNB's account at the Fed. Complete the following T-account to show the impact of this transaction. First National Bank Assets Liabilities Reserves $10 million Discount loan $10 million Assume that before receiving the discount loan, FNB had no excess reserves. The maximum amount of the $10 million that FNB can issue in loans is $10 million Assume that the required reserve ratio is 10%. The maximum total increase in the money supply that can result from the Fed's discount loan is OA. $90 million. O B. $100 million C. $9 million. O D. None of the above. Click to select your answer

Explanation / Answer

Total money supply will increase

=money received by bank/required reserve ratio

Since the Federal has issued discount loan $10 million to first national bank.

Required reserve ratio is 10% or 0.10

Total maximum increase in money supply=$10/0.10

=$100 million

It mean total maximum money supply will increase by $100 million.

Hence option B is the correct answer.

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