First Safety, a commercial bank, has 6,000,000 of outstanding demand deposits and actual reserves of 1,700,000 . If the reserve ratio is 25 percent, what is the maximum amount of new loans the bank can extend?
a. 100,000
b. 425,000
c. 200,000
d. 1,500,000
Question 2
Suppose that the economy has witnessed an 8 percent increase in its money supply over the last few years and the Fed now announces a plan to increase the money supply by 4 percent per year. What will be the public response, assuming that the Fed has a reputation for always implementing its announced plans?
a. High-wage contracts will prevail, and the economy will experience lower inflation at the cost of higher unemployment.
b. High-wage contracts will prevail, and the economy will experience lower unemployment at the cost of higher inflation.
c. Low-wage contracts will emerge, and the economy will experience lower inflation with no change in the unemployment rate.
d. Low-wage contracts will emerge and the economy will experience higher unemployment with no change in the inflation rate.
e. Low-wage contracts will emerge, and the economy will experience lower inflation at the cost of higher unemployment.
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