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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