If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent:

Question

Quizplus · Accepted Answer

When the bank sells a security to the Fed, it gains reserves equal to the purchase price of the security. In this case, the bank gains $1,000 in reserves. However, it must hold 20% of these reserves as required reserves, leaving the remaining 80% as excess reserves. Therefore, the bank has $800 in excess reserves that it can lend out.

If a Bank Sells a $1,000 Security to the Fed