Suppose that the required reserve ratio is 25 percent. If the Federal Reserve purchases $20 million of government securities from Bank of America, the maximum amount that the bank can safely lend is

Question

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When the Federal Reserve purchases $20 million of government securities, Bank of America's reserves increase by $20 million. With a 25% reserve requirement, the bank must keep $5 million (25% of $20 million) as reserves, allowing it to lend out the remaining $15 million. However, the question asks for the maximum amount the bank can safely lend, which is the entire $20 million, as the reserve requirement applies to deposits, not directly to the securities purchase.

Suppose That the Required Reserve Ratio Is 25 Percent