If a Bank Uses $80 of Reserves to Make a New

question 43

Multiple Choice

If a bank uses $80 of reserves to make a new loan when the reserve ratio is 25 per cent, then:

• A)the money supply initially increases by $20
• B)the money supply initially decreases by $80
• C)the level of wealth in the economy will not have changed
• D)the money supply will eventually increase by more than $20 but less than $80

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Definitions:

Current Liabilities

Debts or obligations that are due to be paid within one year or within the normal operating cycle of the business, whichever is longer.

Accounts Receivable

Money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

Rate of Return on Investment

A measure of the profitability and efficiency of an investment, calculated by dividing the investment's gain by its cost.

Owners' Equity

refers to the owner's interest in the assets of a business after all liabilities have been deducted.