Refer to Exhibit 13-1.Suppose that the Federal Reserve conducts open market operations by purchasing $1,000 worth of government securities from Bank A.As a result,Bank A finds itself with $1,000 in excess reserves that it lends out and those funds end up in Bank B.The loan made by Bank B ends up in Bank C.What dollar value goes in blanks (C)and (D),respectively?.

Question

Quizplus · Accepted Answer

Explanation: When the Federal Reserve purchases $1,000 worth of government securities, Bank A gains $1,000 in excess reserves. Assuming a 10% reserve requirement, Bank A can lend out 90% of this, or $900, which is deposited into Bank B (this is the value for blank C). Bank B, in turn, can lend out 90% of these funds, or $810, which ends up in Bank C (this is the value for blank D).