Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money
A) will decrease by $2, but the money-creating potential of the commercial banking system will not be affected.
B) is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8.
C) will directly increase by $2, and the money-creating potential of the commercial banking system will decrease by an additional $8.
D) will directly increase by $2, and the money-creating potential of the commercial banking system will increase by an additional $8.

Question

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money
A) will decrease by $2, but the money-creating potential of the commercial banking system will not be affected. 
B) is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8. 
C) will directly increase by $2, and the money-creating potential of the commercial banking system will decrease by an additional $8. 
D) will directly increase by $2, and the money-creating potential of the commercial banking system will increase by an additional $8.

Quizplus · Accepted Answer

The Answer of  Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money
A) will decrease by $2, but the money-creating potential of the commercial banking system will not be affected. 
B) is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8. 
C) will directly increase by $2, and the money-creating potential of the commercial banking system will decrease by an additional $8. 
D) will directly increase by $2, and the money-creating potential of the commercial banking system will increase by an additional $8.

Refer to the Given Balance Sheets and Assume the Reserve