Use the Following to Answer Questions

question 161

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) As a result of Sheila's deposit, Perez Bank can increase its loans by

• A) $10,000.
• B) $90,000.
• C) $100,000.
• D) $1,000,000.

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Definitions:

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