Assume the Fed's Required Reserve Ratio Is 12

question 29

True/False

Assume the Fed's required reserve ratio is 12%. Further assume that the Fed buys $10 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, in his bank. His bank's reserve account with the Fed has increased by $10 million and so have its (demand) deposits, its total reserves, and the overall level of M₁. However, required reserves have risen only by $1.2 million. This leaves an additional $8.8 million that the bank is free and eager to invest in order to improve its income.

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Definitions:

Zero Economic Profit

A situation where total revenues are exactly equal to total costs, indicating no supernormal profit beyond the normal rate of return.

Marginal Cost

The increase in total production cost that comes from making or producing one additional unit of a good.

Excess Capacity

A scenario where a firm's actual production is less than its maximum potential output, often leading to inefficiencies and higher costs.

Monopolistically Competitive

Describes a market structure where many firms sell products that are similar but not identical, allowing for competition based on factors other than just price, such as brand and quality.