Suppose banks desire to keep 5 percent of their deposits on reserve. If the Fed purchases $20 million worth of government bonds from Bank B, the amount of bonds and loans Bank B holds will

Question

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When the Fed purchases $20 million worth of government bonds from Bank B, the bank receives $20 million in reserves. This action does not decrease the amount of bonds and loans the bank holds; instead, it directly increases the bank's reserves by $20 million. The bank's assets shift from holding $20 million in bonds to having $20 million more in reserves.

Suppose Banks Desire to Keep 5 Percent of Their Deposits