Refer to the Given Balance Sheets and Assume the Reserve

question 330

Multiple Choice

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money

• A) will decrease by $2, but the money-creating potential of the commercial banking system will not be affected.
• B) is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8.
• C) will directly increase by $2, and the money-creating potential of the commercial banking system will decrease by an additional $8.
• D) will directly increase by $2, and the money-creating potential of the commercial banking system will increase by an additional $8.

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