If the Reserve Ratio Is 15 Percent, and Banks Do

question 366

Multiple Choice

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $65 million worth of bonds to the public, bank reserves

• A)increase by $65 million and the money supply eventually increases by $266.67 million.
• B)increase by $65 million and the money supply eventually increases by $433.33 million.
• C)decrease by $65 million and the money supply eventually decreases by $266.67 million.
• D)decrease by $65 million and the money supply eventually decreases by $433.33 million.

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Definitions:

Active Approach

A management strategy involving ongoing adjustments and proactive measures in portfolio or economic policy decisions to achieve desired outcomes.

Recessionary Gap

A situation where the real GDP is lower than the potential GDP at the full employment level, resulting in underutilized resources and higher unemployment.

Public Policy

A course of action or inaction chosen by public authorities to address a given problem or interrelated set of problems.

Active Policy Approach

A strategy where government policies actively seek to influence economic conditions, such as through fiscal and monetary policies, to achieve specific economic goals.