Suppose that, for every 1-percentage-point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from federal reserve banks. also assume that the reserve ratio is 10 percent. if the fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will

reserves will be  0.1 billion

Explanation:

given data

discount rate  = 1 %

borrow = $2 billion

reserve ratio = 10%

discount rate= 4.0% to  3.5%

to find out

bank reserves will be

solution

we know here discount rate is  1 % with borrow additional $2 billion and reserve ratio is 10%

and here discount rate is 0.5 % for 4% to 3.5 %

so here we can say bank will borrow $2 billion × 0.5

bank borrow  = $1  billion

and

here bank reserves increase that is 10% ×  $1  billion

so  reserves will be 0.10 ×  $1  billion = 0.1 billion

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