Scenario 1: Fed Buys Bonds from Sheila Jones

question 163

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. Once the full impact of the Fed's open market purchase and Sheila's deposit worked its way through the banking system, what is the maximum change on the money supply as a result of these two events?

• A) Money supply falls by $100,000.
• B) Money supply falls by $1,000,000.
• C) Money supply rises by $10,000.
• D) Money supply rises by $1,000,000.

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Definitions:

Sand

Fine particles of rock and mineral matter, typically found on beaches, deserts, and riverbeds.

Paleozoic Era

That part of geologic time extending from roughly 541 million to 252 million years ago; divided into six periods: Cambrian (appearance of many new animal groups, the Cambrian radiation or Cambrian explosion); Ordovician (diversification of sea life); Silurian (appearance of jawed fishes, terrestrial plants, and air-breathing animals); Devonian (appearance of sharks and bony fishes); Carboniferous (great.

Silurian Period

A geologic time period that occurred roughly 443.8 to 419.2 million years ago, characterized by significant biological diversity and the early development of terrestrial ecosystems.

Ediacaran Period

The last (most recent) period of the Proterozoic eon, from 635 million to 541 million years ago; named for early animal fossils found in the Ediacara Hills in South Australia.