Suppose a Bank Has Excess Reserves of $50 and the Reserve

question 131

Multiple Choice

Suppose a bank has excess reserves of $50 and the reserve ratio is 20%. If Andy deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the money supply:

• A) is increased by $7,500.
• B) is increased by $2,500.
• C) remains unchanged.
• D) is decreased by $5,000.

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Definitions:

Compound Interest Factors

Mathematical factors used to calculate the future value of an investment or loan, considering the effect of compounding interest over time.

Future Value

The estimated amount of money an investment will grow to over a specified period of time, based on a projected rate of interest or growth rate.

Annuity

An investment vehicle offering a consistent series of disbursements to a person, commonly utilized as a revenue source for those in retirement.

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return, used in discounted cash flow analysis.