Scenario 1: Fed Buys Bonds from Sheila Jones

question 109

Multiple Choice

Scenario 1: Fed Buys Bonds from Sheila Jones
Consider a banking system in which the reserve requirement is 10%, banks try not to hold excess reserves, consumers and firms hold money only in the form of checking account balances, and all loan proceeds are spent. Suppose initially all banks in the system are loaned up. Now, suppose that the Fed buys a $100,000 bond from Sheila Jones, who banks at the Perez Bank, and that she deposits her check in her checking account at Perez Bank.
-Refer to Scenario 1. As a result of Sheila's deposit, Perez Bank can increase its loans by

• A) $10,000.
• B) $90,000.
• C) $100,000.
• D) $1,000,000.

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Definitions:

Dynamite

An explosive made of nitroglycerin, sorbents (like silica), and stabilizers, invented by Alfred Nobel and used in mining and construction.

Nonvolatile Solute

A solute that does not easily vaporize into gas under existing conditions, typically leading to an increase in the boiling point of the solvent when dissolved.

Solvent

A substance, usually a liquid, capable of dissolving other substances (solutes) to form a solution.

Melting Point

The point at which a solid transitions into a liquid under the conditions of atmospheric pressure.