If the reserve requirement is 20 percent and the Fed buys $10,000 worth of Treasury bonds, what is the change in the banks' total reserves?
A)$2,000
B)$10,000
C)$20,000
D)$50,000
E)100,000

Question

Quizplus · Accepted Answer

If the reserve requirement is 20%, for every $10,000 of deposits the bank must hold $2,000 in reserve. When the Fed buys $10,000 worth of Treasury bonds, the bank receives $10,000 in exchange, which is new reserves for the bank. Since the reserve requirement ratio is 20%, banks can lend out $8,000 of the new reserves and have to hold $2,000 as required reserves. Therefore, the change in the banks' total reserves is $10,000.

If the Reserve Requirement Is 20 Percent and the Fed