Answer the Question Based on the Information in the Table

question 310

Multiple Choice

$$\begin{array} { | c | c | c | c | } \hline \text { Money Supply } & \text { Money Demand } & \text { Interest Rate } & \begin{array} { c } \text { Investment (at Interest } \\\text { Rate Shown) }\end{array} \\\hline \$ 400 & \$ 600 & 2 \% & \$ 700 \\\hline \$ 400 & 500 & 3 & 600 \\\hline \$ 400 & 400 & 4 & 500 \\\hline \$ 400 & 300 & 5 & 300 \\\hline \$ 400 & 200 & 6 & 200 \\\hline\end{array}$$
Answer the question based on the information in the table. Suppose the legal reserve requirement is 10 percent and initially there are no excess reserves in the banking system. If the Fed wished to reduce the interest rate by 1 percentage point, it would

• A) sell $10 of government bonds in the open market.
• B) buy $100 of government bonds in the open market.
• C) sell $100 of government bonds in the open market.
• D) buy $10 of government bonds in the open market.

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Definitions:

ROE

Return on Equity, a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Required Return

The minimum expected return an investor demands for holding a particularly risky investment.

Plowback Ratio

The percentage of profits a company keeps instead of paying out to shareholders in the form of dividends.

Risk-Free Rate

This refers to the theoretical rate of return of an investment with no risk of financial loss, typically represented by government bonds.