If the Reserve Requirement Is 25% and $5,000 Is Injected

question 97

Multiple Choice

If the reserve requirement is 25% and $5,000 is injected into the banking system, the maximum expansion in the money supply would be

• A) $1,250.
• B) $20,000.
• C) $6,667.
• D) $4,000.

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Definitions:

Payoff Profile

A graphical representation showing the potential profit and loss of an investment strategy at different prices of the underlying asset at expiration.

Hedge

An investment made to reduce the risk of adverse price movements in an asset, usually through derivatives such as options or futures contracts.

Financial Engineering

The application of mathematical techniques to solve financial problems, including designing new financial instruments.

Financial Instruments

Contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity.