Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in a bank with a 10 percent required reserve ratio, the bank can extend new loans in the amount of:
A) $20,000.
B) $90,000.
C) $100,000.
D) $120,000.

Question

Quizplus · Accepted Answer

When the dealer deposits the $100,000 check from the Fed, the bank is required to hold 10% as reserves, which is $10,000. The remaining $90,000 is considered excess reserves, which the bank can use to extend new loans. Since the required reserve ratio is 10%, the bank can potentially lend out up to 90% of its excess reserves, which is $81,000. Therefore, the bank can extend new loans in the amount of $81,000, not the total amount of the Fed check.

Assume the Fed Purchases a Government Security from a Private