Suppose the Reserve Ratio Is 20 Percent and Banks Do

question 24

Multiple Choice

Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Suppose the Bank of Canada sells $10 million of bonds to the public. Which statement best describes the effects of this open-market operation?

• A) Bank reserves increase by $1 million, and the money supply eventually increases by $10 million.
• B) Bank reserves increase by $10 million, and the money supply eventually increases by $50 million.
• C) Bank reserves decrease by $1 million, and the money supply eventually increases by $10 million.
• D) Bank reserves decrease by $10 million, and the money supply eventually decreases by $50 million.

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Definitions:

John Adams

The second President of the United States (1797-1801), a Founding Father, and a key figure in the American Revolution and the drafting of the Declaration of Independence.

Samuel Adams

An American statesman, political philosopher, and one of the Founding Fathers of the United States, known for his role in the American Revolution.

Paul Revere

An American silversmith, engraver, early industrialist, and a Patriot in the American Revolution, best known for his midnight ride to alert the colonial militia of the approaching British forces.

Boston Massacre

A confrontation on March 5, 1770, in which British soldiers killed five civilian men in Boston, escalating tensions that led to the American Revolutionary War.