Use the Following to Answer Questions

question 33

Multiple Choice

Use the following to answer questions .
Exhibit: Fed Buys Bonds
Scenario 1: Fed Buys Bonds from Sheila Jones
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 buys a $100,000 bond from Sheila Jones, who banks at the Perez Bank, and that she deposits her check in her checking account at Perez Bank.
-(Exhibit: Fed Buys Bonds) Once the full impact of the Fed's open market purchase and Sheila's deposit worked 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 falls by $100,000.
• B) Money supply falls by $1,000,000.
• C) Money supply rises by $10,000.
• D) Money supply rises by $1,000,000.

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Definitions:

Forward Rate

The agreed-upon future price of a financial transaction, typically used in the context of currency exchange rates or interest rates for financial instruments.

Indian Rupees

The official currency of India, symbolized as ₹ and abbreviated as INR, used for all forms of transactions within the country.

Import

The act of bringing goods or services into one country from another for the purpose of trade.

Interest Rate Parity

A theory suggesting that the difference in interest rates between two countries will be equal to the differential between the forward exchange rate and the spot exchange rate.