Assume that the Federal Reserve has purchased a $1,000 security from an individual,the required reserve ratio is 20 percent,and that individual deposits the proceeds in his bank.What is the increase in excess reserves for this bank?

Question

Quizplus · Accepted Answer

The increase in excess reserves for the bank is $800. When the individual deposits the $1,000 from the security purchase into their bank, the bank must keep 20% ($200) as required reserves. The remaining $800 can be used as excess reserves, which the bank can lend out or invest.

Assume That the Federal Reserve Has Purchased a $1,000 Security