Assume That the Required Reserve Ratio Is 20 Percent

question 150

Multiple Choice

Assume that the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from commercial banks, 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:

Interest Payment

The payment made by a borrower to a lender as a form of compensation for the use of borrowed money.

Investment

The allocation of resources, such as capital, with the expectation of generating an income or profit.

Annual Returns

The percentage gain or loss on an investment over a one-year period.

Stock

Equity investment that represents ownership in a company and entitles the holder to a proportion of its profits.