The Fed purchases $1 million of U.S.government securities from First Bank.The desired reserve ratio is 10 percent, the currency drain is zero, and banks loan all excess reserves.The Fed's purchase increases First Bank's excess reserves by how much?

Question

Quizplus · Accepted Answer

The Fed's purchase of $1 million of government securities increases First Bank's reserves by $1 million. The desired reserve ratio is 10 percent, so First Bank must hold $100,000 (10% of $1 million) in required reserves. The remaining $900,000 is excess reserves, which the bank can loan out. Therefore, the Fed's purchase increases First Bank's excess reserves by $900,000.

The Fed Purchases $1 Million of U