Suppose the Fed purchases $40,000 of U.S.Treasury bonds from Donald Trump,who deposits the money with First National Bank.If the required reserve ratio is 20 percent,this transaction will increase the excess reserves of First National Bank by
A)$8,000.
B)$32,000.
C)$40,000.
D)$200,000.

Question

Quizplus · Accepted Answer

The purchase of $40,000 in Treasury bonds by the Fed increases the reserves of the banking system by $40,000. If the required reserve ratio is 20%, then First National Bank is required to hold 20% of the deposit as reserves and can lend out the remaining 80%. Therefore, the increase in excess reserves will be 80% of $40,000 which is $32,000.

Suppose the Fed Purchases $40,000 of U