Question

When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base.

A. increase; decrease
B. decrease; decrease
C. increase; increase
D. decrease; increase

Answer 1

B) decrease; decrease

Step-by-step explanation:

When a private bank repays a loan to the FED, the amount of reserves held by the banking system will decrease. The monetary base will also decrease since the banks have the ability to create money, and all the money held by the FED is not included in the monetary base.