Suppose the Fed requires banks to hold 10 percent of their deposits as reserves. A bank has $20,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?
A)$29,000
B)$28,100
C)$19,100
D)$11,000

Question

Quizplus · Accepted Answer

The bank has $20,000 of excess reserves. After selling the Fed a Treasury bill for $9,000, the bank's reserves decrease by $9,000, leaving it with $11,000 of excess reserves. If the bank decides to hold only required reserves, it must hold 10% of its deposits as reserves. Since the bank has $20,000 of deposits, it must hold $2,000 as required reserves. This leaves it with $11,000 - $2,000 = $9,000 of excess reserves. The bank can now lend out $9,000.

Suppose the Fed Requires Banks to Hold 10 Percent of Their