Assume That the Required Reserve Ratio Is 20 Percent

question 147

Multiple Choice

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately

• A) increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million.
• B) increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million.
• C) increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million.
• D) increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million.

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Definitions:

Harry S. Truman

The 33rd President of the United States, known for his decision to use atomic bombs against Japan in WWII and initiating the Marshall Plan to rebuild Europe.

Soviet Union

A Eurasian socialist nation that was in existence from 1922 to 1991, formally called the Union of Soviet Socialist Republics (USSR).

Red Army

The army and air force of the Russian Soviet Federative Socialist Republic and, after 1922, the Union of Soviet Socialist Republics.

Japan

An island nation in East Asia, known for its rich cultural heritage, technological advancements, and as a leading global economic powerhouse.