Question

When a bank repays a loan at the discount window to the Federal Reserve, which of the following will happen?

1) It will decrease bank reserves and decrease the monetary base.
2) It will increase the monetary base by decreasing bank reserves.
3) It will decrease bank reserves but have no effect on the monetary base.
4) It will decrease bank reserves and immediately raise interest rates.

Answer 1

When a bank repays a loan at the discount window to the Federal Reserve, it will decrease bank reserves but have no effect on the monetary base.

Step-by-step explanation:

When a bank repays a loan at the discount window to the Federal Reserve, it will decrease bank reserves but have no effect on the monetary base. When a bank repays a loan at the discount window to the Federal Reserve, it will decrease bank reserves but have no effect on the monetary base.

The discount window is a lending facility provided by the Federal Reserve to commercial banks. When a bank repays a loan at the discount window, it is essentially returning the borrowed reserves to the Federal Reserve, reducing its own reserves. However, this transaction does not affect the monetary base, which refers to the total amount of currency in circulation plus the reserves held by banks.