Scenario 13.1
Assume the following conditions hold.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The investment spending function is as illustrated in the figure below.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.

-Refer to Scenario 13.1. What is the change in required reserves following the open market operation by the Fed?
A) +$0.33 billion
B) -$0.33 billion
C) +$0.67 billion
D) -$0.67 billion
E) +1.0 billion

Question

Scenario 13.1
Assume the following conditions hold.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The investment spending function is as illustrated in the figure below.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.
 
-Refer to Scenario 13.1. What is the change in required reserves following the open market operation by the Fed?
A) +$0.33 billion 
B) -$0.33 billion 
C) +$0.67 billion 
D) -$0.67 billion 
E) +1.0 billion

Quizplus · Accepted Answer

The Fed's purchase of $1 billion in Treasury securities increases the monetary base by $1 billion. The required reserve ratio is 10%, so the change in required reserves is $1 billion * 10% = $0.1 billion. However, the Fed also sells $0.33 billion in Treasury securities to offset the increase in the monetary base, so the net change in required reserves is $0.1 billion - $0.33 billion = -$0.23 billion.

Scenario 13.1 Assume the Following Conditions Hold