Question

 

Which of the following actions will increase bank lending?

Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers.

The Bank of Canada buys $400 million worth of bonds from chartered banks.

The chartered banks raise the desired reserve ratio from 10 to 11 percent.

The Bank of Canada lowers the bank rate from 4 to 2 percent.

The Bank of Canada raises the bank rate from 5 to 6 percent.

Answer 1

Solution:-

• -The Fed buys $400 million worth of Treasury bonds from Chartered bank
• -The Fed lowers the discount rate from 4 percent to 2 percent.

Discount rate is the rate at which banks borrow from the Federal Reserve, hence a lower discount rate reduces the costs of borrowing by banks from the Fed and thus increases the amount banks would borrow from Fed

In the 2nd case if Fed buys $400 million worth of treasury bonds from Chartered banks, in return it would release $400 million to other banks. Thus the banks’ lending increases by $400 million.