Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Y, then the amount of reserves held by Bank Y will
A)decrease by $20 million.
B)decrease by $2 million.
C)increase by $2 million.
D)increase by $20 million.
E)not change.

Question

Quizplus · Accepted Answer

When an individual withdraws $20 million from Bank Y, Bank Y's required reserves decrease by $2 million (10% of $20 million). Since Bank Y currently has no excess reserves, it must adjust its reserves by reducing its deposits at the Federal Reserve or by borrowing from other banks in the federal funds market. Therefore, the amount of reserves held by Bank Y will decrease by $2 million.

Suppose the Required Reserve Ratio Is 10 Percent, and Banks