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

Question

Quizplus · Accepted Answer

With a reserve requirement of 20%, each dollar of reserves can support $5 of deposits because the multiplier is 1/reserve requirement, which is 1/0.20 = 5. Therefore, a $1 billion purchase of government securities by the Fed increases the potential amount of checkable deposits by $5 billion.

Suppose the Reserve Requirement Is 20 Percent and Banks Hold