In a Fractional Reserve Banking System with No Excess Reserves

question 25

Multiple Choice

In a fractional reserve banking system with no excess reserves and no currency holdings, suppose the central bank buys $100 million of bonds. Which statement best describes the effects of this open-market operation?

• A) Reserves and the money supply increase by less than $100 million.
• B) Reserves increase by $100 million, and the money supply increases by $100 million.
• C) Reserves increase by $100 million, and the money supply increases by more than $100 million.
• D) Both reserves and the money supply increase by more than $100 million.

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Definitions:

Export Industries

Sectors or companies that primarily produce goods or services for consumption outside of their home country.

Joint Venture

A business arrangement where two or more parties agree to pool their resources for the purpose of accomplishing a specific task.

Operating Methods

Established procedures or techniques used in conducting business or carrying out tasks and processes within an organization.

Exporting

The selling of local products abroad to foreign customers.