Assume That the Required Reserve Ratio Is 20 Percent

question 144

Multiple Choice

Assume that the required reserve ratio is 20 percent.If the Federal Reserve buys $80 million in government securities from commercial banks, then the money supply will immediately

• A)increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million.
• B)increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million.
• C)increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another
• D)increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will decrease by another

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Definitions:

Working Capital Management

The process of managing short-term assets and liabilities to ensure a company has sufficient liquidity to run its operations smoothly.

Capital Budgeting

The process of planning and managing a company's long-term investments in projects and assets to maximize value and ensure financial sustainability.

Capital Structure

The combination of long-term liabilities, targeted short-term borrowings, ordinary shares, and preferred shares that finance a corporation's daily functions and expansion.

Capital Structure

This term describes the mix of debt and equity that a company uses to finance its operations and growth.