Use the Following to Answer Questions

question 204

Multiple Choice

Use the following to answer questions .
Exhibit: Fed Buys Bonds
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.
-(Exhibit: Fed Buys Bonds) 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:

Mark-up

The amount added to the cost price of goods to cover overhead and profit, resulting in the retail price.

Retailer

A business or person that sells goods to the consumer, as opposed to a wholesaler or supplier.

Cost

The value spent to acquire or produce something, including the amount of money, time, or resources.

Selling Price

The price at which a product or service is offered for sale to a purchaser.