Final answer:
The correct answer to the question is C. Borrowing money from the Federal Reserve increases a bank's reserves and helps it manage liquidity and meet reserve requirements. It is a common practice, not an indication of insolvency.
Step-by-step explanation:
When a bank borrows money from the Federal Reserve, it is primarily to manage its reserves and ensure stability, not necessarily a sign of insolvency. Reserves increase for the bank. By borrowing from the Federal Reserve, the bank increases its reserves, which is essential for meeting various requirements such as reserve requirements and to ensure it has enough liquidity to operate on a day-to-day basis. This action does not directly impact the bank's ability to lend, unless the additional reserves are needed to correct a shortfall. Moreover, this borrowing is a common practice used to manage short-term liquidity issues.
Banks are required to hold a certain amount of money in reserve to meet withdrawal demands and other obligations (point 5). When a bank borrows from the Federal Reserve, the amount of reserves it holds increases. Thus, this action can temporarily help the bank meet its reserve requirement without having to reduce its loans (point 4).