Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | }
\hline { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \
\text { Excess reserves } & 16,000 & & \
\text { Loans } &{ 0 } & \
\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \
\hline
\end{array}$$ Assume all banks in the system started with the balance sheet shown in Exhibit 19-4 and the Fed makes a $1,000 open market purchase. The result would be a(n):

Question

Exhibit 19-4 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } 
\hline  { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$ 4,000 & \text { Checkable deposits } & \$ 20,000 \
\text { Excess reserves } & 16,000 & & \
 \text { Loans } &{ 0 } & \
\text { Total } & \$ 20,000 & \text { Total } & \$ 20,000 \
\hline
\end{array}$$ Assume all banks in the system started with the balance sheet shown in Exhibit 19-4 and the Fed makes a $1,000 open market purchase. The result would be a(n):

Quizplus · Accepted Answer

The $1,000 open market purchase increases the bank's reserves by $1,000. With a reserve requirement of 20% (since $4,000 is required reserves for $20,000 deposits), the money multiplier is 5 (1/0.2). Thus, the money supply can expand by $1,000 x 5 = $5,000.

Exhibit 19-4 Balance Sheet of Tucker National Bank Assume All Banks in the System Started with the Balance