Suppose the Fed purchases $40,000 of U.S. Treasury bonds from Benjamin, who deposits the money with First National Bank. If the required reserve ratio is 20 percent, this transaction will increase the excess reserves of First National Bank by

Question

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When the Fed purchases $40,000 of U.S. Treasury bonds from Benjamin, the money is deposited in First National Bank. As the required reserve ratio is 20 percent, the bank is required to hold 20 percent of the deposit as reserves, while the remaining 80 percent can be used for new loans or other investments.

Thus, the initial impact on First National Bank's excess reserves will be:

Excess reserves = Deposit - Required reserves
Excess reserves = $40,000 - (20% x $40,000)
Excess reserves = $40,000 - $8,000
Excess reserves = $32,000

Therefore, the transaction will increase the excess reserves of First National Bank by $32,000.

Suppose the Fed Purchases $40,000 of U