If a Bank Sells a $1,000 Security to the Fed

question 18

Multiple Choice

If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent:

• A)the bank has $1,000 in additional excess reserves,of which it can lend $800.
• B)the bank has $1,000 in additional excess reserves,all of which it can lend out.
• C)the bank has lost an asset and must reduce its loans.
• D)the bank has lost a liability.
• E)there is no change in excess reserves,since net assets do not change.

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Definitions:

Operating Activities

Activities directly related to the day-to-day operations of a business, such as sales, purchasing, payroll, and other routine business transactions.

Indirect Method

A way of reporting cash flows from operating activities on the statement of cash flows, adjusting net income for changes in non-cash accounts.

Net Decrease

This represents the overall reduction in a specific financial position or quantity over a period, after accounting for all increases and decreases.

Cash Flow Per Share

The cash flow from operations divided by the number of common shares outstanding.