In a Fractional Reserve Banking System with No Excess Reserves

question 188

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 of the following 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:

Dishonored

A term used to describe a financial instrument, like a cheque or promissory note, that has been presented for payment but was refused.

Insufficient Funds

A situation where one's bank account does not have enough money to cover transactions.

Negotiable Note

A financial instrument guaranteeing payment of a specific amount, which can be transferred among parties.

Cleverly Alters

Deliberately modifies or changes something in a skillful manner to achieve a specific purpose or effect.