In a Fractional-Reserve Banking System with No Excess Reserves and No

question 19

Multiple Choice

In a fractional-reserve banking system with no excess reserves and no currency holdings,if the central bank buys $100 million of bonds,

• 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:

Weak Form

Assumes that all information contained in past price movements is fully reflected in current market prices. Thus, information about recent trends in a stock’s price is of no use in selecting a stock.

Semistrong Form

States that current market prices reflect all publicly available information. Therefore, the only way to gain abnormal returns on a stock is to possess inside information about the company’s stock.

Stock Market Efficiency

The concept that all available information is reflected in stock prices, thus making it impossible to consistently achieve higher returns than the overall market.

Nonconstant Growth Model

A valuation approach for stocks that assumes a company's dividends will grow at different rates in different periods, unlike the constant growth model.