Assume That There Is a 25 Percent Reserve Ratio and That

question 70

Multiple Choice

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities.If the securities are purchased from the nonbank public, this action has the potential to increase money supply by a maximum of

• A)$16 billion, but only by $14 billion if the securities are purchased directly from commercial banks.
• B)$14 billion, but by $16 billion if the securities are purchased directly from commercial banks.
• C)$16 billion, and also by $16 billion if the securities are purchased directly from commercial banks.
• D)$14 billion, and by $20 billion if the securities are purchased directly from commercial banks.

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Definitions:

Investment Guidelines

A set of principles or rules designed to guide the management of investments, ensuring they meet specific objectives and constraints.

Money Market Accounts

Interest-bearing accounts offered by banks and credit unions, providing higher interest rates than savings accounts.

Diversify Investments

A strategy to spread investments across various assets to reduce risk.

Risk-Management

The process of identifying, analyzing, and responding to risk factors throughout the life of a project or business to mitigate risks.