Suppose the Reserve Ratio Is 25% and Banks Do Not

question 99

Multiple Choice

Suppose the reserve ratio is 25% and banks do not hold excess reserves. When the Fed sells $40 million of bonds to the public,

• A) bank reserves increase by $40 million and money supply could increase by a maximum of $40 million.
• B) bank reserves increase by $40 million and money supply could increase by a maximum of $160 million.
• C) bank reserves decrease by $40 million and money supply could decrease by a maximum of $40 million.
• D) bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million.

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Definitions:

Scale

Refers to the size or level of operation, especially in terms of the capacity to produce or serve in business and economics.

Increasing Returns

A situation where an increase in the amount of inputs results in a more than proportional increase in the output, demonstrating enhanced efficiency or productivity.

Inputs

The resources used in the production process to create goods or services, including labor, raw materials, and capital.

Scale

The size or level of activity of a company or operation, or the capacity to adjust the size or level of activity.