Suppose the Fed Purchases $10 Million of U

question 43

Multiple Choice

Suppose the Fed purchases $10 million of U.S. securities from the public. If the reserve requirement is 10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a

• A) $10 million decrease in the money supply.
• B) $10 million increase in the money supply.
• C) $100 million decrease in the money supply.
• D) $100 million increase in the money supply.

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Definitions:

Risk-Free Rate

The risk-free rate is the theoretical return of an investment with zero risk, typically represented by the yield on government securities.

Common Stock

A form of corporate equity ownership, a type of security that represents ownership of equity in a corporation, with voting rights and the potential for dividends.

Risk

Exposure to uncertainty or potential financial loss in any given investment or business venture.

Market Risk

The risk of losses in investments caused by factors that affect the entire market, such as economic changes or political events.