Assume First Central Bank has a desired reserve ratio of 15 ...

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Assume First Central Bank has a desired reserve ratio of 15 percent; 80,000 in total deposits, loans equal to 60,000, and has 20,000 in actual reserves. First Central can make additional loans totaling
 
  A) 8,000.
  B) 12,000.
  C) 20,000.
  D) 60,000.
  E) 80,000.

Question 2

Sarah went to a store that sells used goods to buy a camera. She was looking at different models when the store manager asked her about the maximum price that she would pay.
 
  Because it was impossible to know the quality of the cameras, Sarah lowered her willingness to pay to 200, although she values a used camera of good quality at 300. If the seller values a camera of good quality at 250, what is most likely to happen in this case?

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Answer to Question 1

A

Answer to Question 2

Sarah values a used camera of good quality at 300, while the seller values it at 250. If Sarah had perfect information about the quality of each camera, trade would have taken place at a price between 250 and 300. However, because Sarah is unaware of the quality of the cameras and has a lower value for a camera of poor quality, she is willing to pay only 200. At 200, the seller will not be willing to give her a good-quality camera because he values it at 250. As a result, Sarah will end up buying a camera of poor quality. Such a phenomenon is commonly known as adverse selection.