When the desired reserve ratio is 10 percent,suppose the Fed buys $1,000,000 of government securities from banks.As a result,the banks' excess reserves
A)increase by $900,000.
B)increase by $1,000,000.
C)increase by $10,000.
D)decrease by $10,000.
E)decrease by $1,000,000.

Question

Quizplus · Accepted Answer

When the Fed buys $1,000,000 of government securities from banks, the banks will receive $1,000,000 in reserves from the Fed. If the desired reserve ratio is 10 percent, the banks are required to hold $100,000 in reserves against this deposit. This means that the remaining $900,000 will be excess reserves, which will increase by $900,000. Therefore, the correct option is B.

When the Desired Reserve Ratio Is 10 Percent,suppose the Fed