Assume That the Required Reserve Ratio Is 25 Percent

question 83

Multiple Choice

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately

• A) decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million.
• B) decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million.
• C) increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million.
• D) increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million.

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Definitions:

Interest Rate

This is a fee, calculated as a percentage, that lenders charge borrowers for the use of their money or that borrowers earn on deposits.

Interest Payments

Payments made to lenders as compensation for the use of borrowed money, typically calculated as a percentage of the principal amount.

Interest Rates

The cost of borrowing money or the return on investment capital, expressed as a percentage of the money borrowed or invested.

Loan

A borrowed sum of money that is expected to be paid back with interest.