Table 13-1 EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS

question 119

Multiple Choice

Table 13-1
EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)



-After the transaction in Table 13-1 is completed, what happens to actual reserves, required reserves, and excess reserves?
Assume the required reserve ratio is 25 percent.

• A)Actual reserves increase by $10 million, required reserves increase $2.5 million, and excess reserves increase by $7.5 million.
• B)Actual reserves decrease by $10 million, required reserves decrease $2.5 million, and excess reserves decrease by $7.5 million.
• C)Actual reserves increase by $10 million, required reserves are unchanged, and excess reserves increase by $10 million.
• D)Actual reserves decrease by $10 million, required reserves decrease by $10 million, and excess reserves are unchanged.

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Definitions:

Common Stock

Equity securities representing ownership in a company, entitling holders to vote on corporate matters and receive dividends.

Deferred Tax Liability

A tax obligation that a company owes in the future due to temporary differences between its financial accounting and tax accounting practices.

Indirect Method

A method used in cash flow statements to adjust net income for non-cash transactions and changes in working capital to calculate cash flow from operating activities.

Indirect Method

A way of preparing the cash flow statement where net income is adjusted for changes in balance sheet accounts to calculate cash flow from operating activities.