Answer the indicated question on the basis of the information in Table 14.2.Each question is based on the original balance sheet.

-Using the reserve requirement in Table 14.2,if the Fed buys $20 billion worth of bonds in the open market,the lending capacity of the banking system will _______ by approximately ______.
A) Rise;$20 billion
B) Rise;$133 billion
C) Fall;$20 billion
D) Fall;$133 billion

Question

Answer the indicated question on the basis of the information in Table 14.2.Each question is based on the original balance sheet.
 
-Using the reserve requirement in Table 14.2,if the Fed buys $20 billion worth of bonds in the open market,the lending capacity of the banking system will _______ by approximately ______.
A) Rise;$20 billion 
B) Rise;$133 billion 
C) Fall;$20 billion 
D) Fall;$133 billion

Quizplus · Accepted Answer

According to the reserve requirement in Table 14.2, the required reserves ratio is 10% and the total reserves held by banks is $200 billion. If the Fed buys $20 billion worth of bonds, this increases the total reserves held by banks to $220 billion ($200 billion + $20 billion). Banks are required to hold 10% of their deposits as reserves, meaning they must hold $22 billion in reserves ($220 billion x 0.1). If we assume that banks were previously fully loaned up, the increase in reserves will allow them to increase their lending capacity by the amount of excess reserves, which is $20 billion ($22 billion - $2 billion). Therefore, the lending capacity of the banking system will rise by approximately $20 billion.

Answer the Indicated Question on the Basis of the Information