Scenario 1: Fed Buys Bonds from Sheila Jones

question 223

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. Which of the following happens when Sheila Jones deposits the proceeds from the sale of her bond to the Fed into her checking account at the Perez Bank?

• A) Perez Bank's checkable deposits increases by $100,000 and its reserves increases by $90,000.
• B) Perez Bank's checkable deposits and reserves increase by $100,000 each.
• C) Perez Bank's checkable deposits increases by $90,000 and its reserves increases by $100,000.
• D) Perez Bank's checkable deposits and reserves increase by $90,000 each.

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Definitions:

Intrinsic Value

An underlying or fundamental value. In securities analysis, the price of a security (usually a stock) derived from extensive analysis of the issuing company and its industry. In financial options, the difference between the market price of the underlying stock and the price at which an option on that stock can be exercised (the strike price) if that difference is positive, zero if it is not.

Stock Dividend

A payment made by a corporation to its shareholders in the form of additional shares, rather than cash.

Retained Earnings

Profits that a company has earned to date, less any dividends or other distributions paid to shareholders, which are reinvested into the business.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a snapshot of its financial condition.