Scenario 2: Fed Sells Bonds to Henry Hyde

question 151

Multiple Choice

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.
-Refer to Scenario 2.Once the full impact of the Fed's open market sale work its way through the banking system, what is the maximum change on the money supply as a result of these two events?

• A)Money supply rises by $5,000.
• B)Money supply rises by $500,000.
• C)Money supply falls by $50,000.
• D)Money supply falls by $500,000.

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Definitions:

Market Value

The present rate at which a service or asset is available for purchase or sale on the open market.

Present Value

Present Value is a financial concept that calculates the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Contract Interest Rate

The interest rate specified in a loan or bond agreement, representing the cost of borrowing or the rate of return promised to lenders.

Troubled Debt Restructuring

A process where the terms of a debt are modified due to the debtor's financial difficulties to provide relief.