Assume That the Required Reserve Ratio Is 20 Percent

question 239

Multiple Choice

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, 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:

Marginal Benefit

The additional satisfaction or value obtained from acquiring one more unit of a product or service.

Expected Total Return

The sum of all anticipated earnings from an investment, including capital gains, interest, and dividends, over a specified period, reflecting its potential profitability.

Optimal R&D

The most efficient level of investment in research and development activities where marginal cost equals marginal benefit.

Expected Rate Of Return

The increase in profit a firm anticipates it will obtain by purchasing capital or engaging in research and development (R&D); expressed as a percentage of the total cost of the investment (or R&D) activity.