Assume That the Required Reserve Ratio Is 20 Percent

question 76

Multiple Choice

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the general public, then the money supply will immediately:

• A) Increase by $0 with this transaction, and the maximum money-lending potential of the commercial banking system will increase by $400 million
• B) Increase by $0 with this transaction, but the maximum money-lending potential of the commercial banking system will increase by $320 million
• C) Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $400 million
• D) Increase by $80 million with this transaction, and the maximum money-lending potential of the commercial banking system will increase by another $320 million

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Definitions:

Historical Cost Principle

An accounting principle that states assets should be recorded and reported at their original purchase price, not their current market value.

Economic Entity Assumption

The economic entity assumption is an accounting principle that treats a company as a separate entity from its owners for reporting purposes.

Comparability

A qualitative characteristic of financial information that allows stakeholders to identify similarities and differences between two or more sets of economic facts.

Faithful Representation

A fundamental qualitative characteristic in accounting, ensuring that financial information accurately reflects the economic events it purports to represent.