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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