Question

Atlantic Bank is required to hold 10% of deposits as reserves. If the central bank increases the discount rate, how would Atlantic Bank respond?
A. by noting a decrease in net worth
B. by increasing its reserves
C. its balance sheet will be unchanged
D. it can make more loans with increased loan assets

Answer 1

Answer:

The correct answer to the following question is option B) by increasing its reserves .

Explanation:

The discount rate can be defined as a interest rate which is set by central bank, and this set on the loan that central bank gives to the commercial banks and other institutions ( like depositories ) . Here if the discount rate is increased by the central bank, then the cost of borrowing would become high for the commercial banks, which will lead to decrease in the money supply in the economy and will ultimately lead to decrease in the investment activities.