Assume that the desired reserve ratio for the chartered banks is 25 percent.If Bank of Canada buys $3 billion in government securities from chartered banks we can say that, as a result of this transaction, the lending ability of the chartered banking system will:
A)decrease by $9 billion.
B)increase by $9 billion.
C)increase by $15 billion.
D)increase by $12 billion.

Question

Quizplus · Accepted Answer

The desired reserve ratio for chartered banks is 25%, which means for every $100 in deposits, banks are required to keep $25 as reserves and can lend out $75. If Bank of Canada buys $3 billion in government securities from chartered banks, the reserves of the banks will increase by $3 billion. Since the desired reserve ratio is 25%, this means banks can lend out an additional $9 billion (75% of the $12 billion increase in reserves). Therefore, the lending ability of the chartered banking system will increase by $9 billion.

Assume That the Desired Reserve Ratio for the Chartered Banks