Use the Following to Answer Questions

question 82

Multiple Choice

Use the following to answer questions .
Exhibit: Fed Sells Bonds
Scenario 2: Fed sells bonds to Henry Hyde
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 sells a $50,000 bond to Henry Hyde, who pays for the bond by writing a check drawn against Jekyll Bank.
-(Exhibit: Fed Sells Bonds) Which of the following happens when Henry Hyde pays for the bond by writing a check from his checking account at the Jekyll Bank?

• A) Jekyll Bank's checkable deposits decreases by $50,000 and its reserves decreases by $45,000.
• B) Jekyll Bank's checkable deposits decreases by $45,000 and its reserves decreases by $50,000.
• C) Jekyll Bank's checkable deposits and reserves decrease by $50,000 each.
• D) Jekyll Bank's checkable deposits and reserves increase by $45,000 each.

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Definitions:

Discretionary Policy

Discretionary Policy involves the deliberate use of monetary or fiscal policy changes by government policymakers to address economic issues.

Monetary Policy

Actions undertaken by a central bank to control the supply of money and interest rates in its economy.

Fiscal Policy

Government policies related to taxation and government spending to influence the economy.

Lags

Lags refer to the delay between the implementation of economic policy or action and its actual effect on the economy, often observed in fiscal and monetary policies.