Answer the indicated question on the basis of the information in Table 14.1.Each question is based on the original balance sheet.

-Using the reserve requirement in Table 14.1,if the Fed sells $15 billion worth of bonds in the open market,the lending capacity of the banking system will _______ by approximately ______.
A) Rise;$150 billion
B) Rise;$113 billion
C) Fall;$150 billion
D) Fall;$113 billion

Question

Answer the indicated question on the basis of the information in Table 14.1.Each question is based on the original balance sheet.
 
-Using the reserve requirement in Table 14.1,if the Fed sells $15 billion worth of bonds in the open market,the lending capacity of the banking system will _______ by approximately ______.
A) Rise;$150 billion 
B) Rise;$113 billion 
C) Fall;$150 billion 
D) Fall;$113 billion

Quizplus · Accepted Answer

When the Fed sells bonds, it reduces the reserves in the banking system, leading to a decrease in the lending capacity. The change in lending capacity is calculated using the money multiplier, which is typically the inverse of the reserve requirement ratio. Assuming a reserve requirement of 10%, the money multiplier is 10, so the lending capacity falls by $15 billion x 10 = $150 billion.

Answer the Indicated Question on the Basis of the Information