Suppose the reserve requirement is 20 percent and banks hold no excess reserves. A $1 billion sale of government securities by the Fed will:

Question

Quizplus · Accepted Answer

When the Fed sells $1 billion in government securities, banks buy these securities, which reduces the banks' reserves by $1 billion. With a reserve requirement of 20%, each dollar of reserves supports $5 in checkable deposits (1/0.20 = 5). Therefore, reducing reserves by $1 billion reduces checkable deposits by $5 billion.

Suppose the Reserve Requirement Is 20 Percent and Banks Hold