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Exhibit: Fed Buys Bonds
Scenario 1: Fed Buys Bonds from Sheila Jones
Consider a banking system in which the reserve requirement is 10%, banks try not to hold excess reserves, consumers and firms hold money only in the form of checking account balances, and all loan proceeds are spent. Suppose initially all banks in the system are loaned up. Now, suppose that the Fed buys a $100,000 bond from Sheila Jones, who banks at the Perez Bank, and that she deposits her check in her checking account at Perez Bank.
-(Exhibit: Fed Buys Bonds) Immediately following Sheila's $100,000 deposit into her checking account, Perez Bank
A) has no excess reserves.
B) has $10,000 in excess reserves.
C) has $90,000 in excess reserves.
D) has $100,000 in excess reserves.

Question

Quizplus · Accepted Answer

When Sheila deposits $100,000, the reserve requirement is 10%, so Perez Bank must keep $10,000 as reserves. The remaining $90,000 is excess reserves that can be loaned out.

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