Suppose the required reserve ratio is 10 percent, and the Fed buys $5 million worth of bonds from the public. If the public deposits this amount into transactions accounts, the money supply will
A. Not be affected directly, but an additional lending capacity of $50 million will be created for the banking system.
B. Increase directly by $5 million in reserve deposits, with an additional lending capacity of $40 million created for the banking system.
C. Increase directly by $5 million in reserve deposits, with an additional lending capacity of $45 million created for the banking system.
D. None of the choices are correct.
Answer: C
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How people respond to fiscal policy:
A. is fairly mechanical and appears to conform closely to the predictions of macroeconomic models. B. depends on whether the fiscal policy is financed from borrowing or from budget surpluses. C. depends on their evaluation of the state of the economy and their expectations about the future. D. generally reveals consistent irrationality and poorly-formed expectations about the future.
Once the federal funds rate is reduced to zero, conventional expansionary monetary policy is no longer an option
a. True b. False Indicate whether the statement is true or false