Assume a Simplified Banking System Subject to a 25 Percent

question 226

Multiple Choice

Assume a simplified banking system subject to a 25 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

• A) increases $100,000.
• B) increases $400,000.
• C) increases $125,000.
• D) decreases $500,000.

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Definitions:

Interest

The cost of borrowing money, typically expressed as a percentage of the amount borrowed, that lenders charge borrowers for the use of their funds.

Federal Reserve

The central banking system of the United States, responsible for setting monetary policy, regulating banks, maintaining financial stability, and providing banking services.

Inflation Rate

How quickly the average price of goods and services climbs, lessening the value of money.

Currency

The system of money in general use in a country or economic bloc, used as a medium of exchange for goods and services.