Question

Reserves increase if the Federal Reserve
a. raises the discount rate or auctions more credit.
b. raises the discount rate but not if it auctions more credit.
c. lowers the discount rate or auctions more credit.
d. lowers the discount rate but not if it auctions more credit.

Answer 1

Reserves increase if the Federal Reserve lowers the discount rate or auctions more credit.  

Option C

Explanation:

Unless the Federal Reserve raises liquidity, a single bank may lend its bank reserves to the degree that it produces equivalent deposits. Nevertheless, the banking sector can raise deposits multiple times.

When each bank invests and generates a loan, it reduces reserves for other banks that use it to raise its liquidity and thus create new deposits, until all existing reserves are being used.  

When it has to hold $100 as reserve balances against the investment it makes concurrently it loses reserve sums of $1,000, the most a lender can lend is $900.