Suppose the and the Reserve Requirement Is 10 Percent

question 161

Multiple Choice

Suppose the and the reserve requirement is 10 percent. If Bob writes a check to you for $100 and you choose to cash the check and hold on to $100 in currency, then:

• A) the money supply can increase by as much as $1000.
• B) the money supply will decrease by exactly $100.
• C) the money supply will not change.
• D) the money supply can decrease by as much as $1000.

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Definitions:

Interest Rate

An interest rate is the percentage at which interest is paid by borrowers for the use of money that they borrow from a lender.

Strip Bond

A debt security that is derived from the coupon and principal payments of a bond, which are separated ("stripped") and sold as individual zero-coupon bonds.

Compounded Semi-Annually

Interest calculated on the principal and previously earned interest twice a year.

Quarterly Compounded

An interest calculation method where interest is added to the principal every quarter, increasing the amount of interest earned or paid.