Suppose the Reserve Ratio Is 20 Percent and Banks Do

question 190

Multiple Choice

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $50 million of bonds to the public. Which statement best describes the effects of this open-market operation?

• A) Bank reserves increase by $50 million, and the money supply eventually increases by $250 million.
• B) Bank reserves increase by $50 million, and the money supply eventually increases by $300 million.
• C) Bank reserves decrease by $50 million, and the money supply eventually decreases by $250 million.
• D) Bank reserves decrease by $50 million, and the money supply eventually decreases by $300 million.

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Definitions:

Depreciation

The process of allocating the cost of tangible assets over their useful lives, reflecting the decrease in their value over time.

Intangible Asset

An asset that lacks physical substance but is identifiable and provides economic benefits to the entity, such as patents, trademarks, and copyrights.

Fixed Asset

Long-term tangible property used in the operation of a business and not expected to be consumed or converted into cash in the near term.

Treasury Note

A medium-term government debt security with fixed interest rates and maturities typically between one and ten years.