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,and the loan made by bank C ends up in Bank D.What dollar value goes in blanks (E)and (F),respectively?.

Question

Quizplus · Accepted Answer

In this scenario, the money multiplier is 1/0.1 = 10. This means that for every $1 in excess reserves, $10 will be created in new money. Bank A has $1,000 in excess reserves, which means that it can create $10,000 in new money. If those funds end up in Bank B, that bank can create $9,000 in new money (since it must hold 10% in reserves). If those funds end up in Bank C, that bank can create $8,100 in new money. And if those funds end up in Bank D, that bank can create $7,290 in new money. Therefore, the dollar value that goes in the blanks is $81 for E and $729 for F.