When the fed extends a $100 discount loan to the first national bank, reserves in the banking system.

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09-11-2022
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When the fed extends a $100 discount loan to the first national bank, reserves in the banking system.

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rekharaypriti8910 rekharaypriti8910 · Answer 1 · 2022-11-14T00:45:56+01:00

The Federal Reserve is considered the central bank of the United States. And when they give banks discount loans, it leads to an increase in the monetary base and reserves.

When the Federal Reserve discount loans to banks are rolled over, both the monetary base and reserves will increase. Deposits increase by more than $1 when the Federal Reserve injects additional dollars into the banking system. This is a process known as multiple deposits. Banks are not allowed to use all their excess reserves to buy securities or make loans. When the Federal Reserve cuts the reserve ratio, it reduces the amount of cash banks have to hold in reserves, allowing them to lend more to consumers and businesses. This will increase the country's money supply and expand the economy.

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