Question

Suppose the Federal Reserve (Federal Reserve (Fed)) gave First National Bank (FNB) a $ 10 million...

Suppose the Federal Reserve (Federal Reserve (Fed)) gave First National Bank (FNB) a $ 10 million rediscount loan by increasing the bank's Fed account.

a) Show the effect of this transaction on the FNB balance sheet. Note that the deposits held by banks at the Fed are part of the bank reserve.

B) Assume that the FNB does not have excess reserves before receiving the rediscount loan. How much of the FNB $ 10 million can you loan?

C) What will be the highest total increase in money supply after the Fed's rediscount loan? Assume the required reserve ratio is 10%

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