Suppose the Fed's Required Reserve Ratio Is 12

question 2

Multiple Choice

Suppose the Fed's required reserve ratio is 12%. Further suppose that the Fed buys $50 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, with Bank A. Bank A's reserve account with the Fed has increased by $50 million and so have its (demand) deposits, its total reserves, and the overall level of M₁. How much has required reserves risen?

• A) $50 million
• B) $44 million
• C) $10 million
• D) $6 million

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Definitions:

Consumption

The use of goods and services by households. It is an important component of GDP and a direct indicator of consumer spending behavior.

Income

Earnings received by a person or entity, typically through work, investments, or business ventures.

Interest Rate

The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.

Present Value

The value today of a sum of money or cash flows expected in the future, discounted by a specific rate of return.