What is the maximum change in total deposits at financial institutions if the Fed sells $120 billion of government securities to dealers,and the reserve requirement applicable to all deposits is 10%?
A) $1.20 trillion decrease
B) $133 billion increase
C) $1.08 trillion increase
D) $1.08 trillion decrease
E) None of the above.

Question

Quizplus · Accepted Answer

When the Fed sells $120 billion of government securities to dealers, the reserves of the financial institutions decrease by $120 billion. Due to the reserve requirement of 10%, the maximum change in total deposits at financial institutions would be 10 times the change in reserves, which is $1.2 trillion. However, since the initial change in reserves is a decrease of $120 billion, the maximum change in total deposits would be a decrease of $1.08 trillion. Therefore, the correct choice is (D).

What Is the Maximum Change in Total Deposits at Financial