Suppose the Federal Reserve System Has a Required Reserve Ratio

question 115

Multiple Choice

Suppose the Federal Reserve System has a required reserve ratio of 0.10 and there are no excess reserves in the system.If the Open Market Committee buys $50 million of securities from the commercial banking system,the total lending capacity for the system

• A)Decreases by $50 million.
• B)Decreases by $500 million.
• C)Increases by $50 million.
• D)Increases by $500 million.

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Definitions:

Salvage Value

The estimated value that an asset will realize upon its sale at the end of its useful life.

Accrual Return

The return on investment that is recognized in financial statements before any cash changes hands.

Net Cash Inflows

The amount of cash received by a company from its various operational, investment, and financing activities, minus cash outflows, during a specific period.

Net Present Value

The total present value of a series of future cash flows minus the initial cost of investment.