Assume That the Required Reserve Ratio Is 25 Percent

question 41

Multiple Choice

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately:

• A) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million
• B) Decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million
• C) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million
• D) Increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million

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Definitions:

Recession

A period of temporary economic decline during which trade and industrial activity are reduced, usually identified by a fall in GDP in two successive quarters.

Opportunity Cost

The price paid for not selecting the next most favorable choice during a decision-making process.

Marginal Productivity

The additional output that is produced by using one more unit of a particular input, holding all other inputs constant.

Tourist Income

Revenue generated by a country or region from visitors who travel there from other areas, spending on accommodations, attractions, and other services.