If the Fed wants to increase the lending capacity of the system by $60 billion and the reserve requirement is 10 percent,it should

Question

Quizplus · Accepted Answer

When the Fed buys $6 billion in bonds from banks, this action directly increases the banks' reserves. With a 10 percent reserve requirement, every dollar of reserves can support $10 of lending. Therefore, to increase the lending capacity by $60 billion, the Fed needs to inject $6 billion into the banking system. This is because the multiplier effect allows the banking system to lend out 10 times the amount of the increase in reserves, given the 10 percent reserve requirement.

If the Fed Wants to Increase the Lending Capacity of the System