Assume That There Is a 25 Percent Reserve Ratio and That

question 357

Multiple Choice

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of

• A) $600 million, and also by $600 million if the securities are purchased directly from commercial banks.
• B) $800 million, and also by $800 million if the securities are purchased directly from commercial banks.
• C) $600 million, but by $800 million if the securities are purchased directly from commercial banks.
• D) $800 million, but only by $600 million if the securities are purchased directly from commercial banks.

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Definitions:

Piaget's Approach

A theory of cognitive development that describes how children construct a mental model of the world through stages of learning and understanding.

Short-term Memory

The capacity for holding a small amount of information in an active, readily available state for a short period of time.

Working Memory

A cognitive system with a limited capacity that is responsible for temporarily holding information available for processing.

Sensory Memory

The shortest-term element of memory, which allows individuals to retain impressions of sensory information after the original stimuli have ended.