Suppose the Fed sells $10 million in government securities to a commercial bank.If the required reserve ratio is 0.2,what is the maximum amount by which checkable deposits in the banking system can change?

Question

Quizplus · Accepted Answer

When the Fed sells government securities to a commercial bank, the bank pays for these securities, which decreases the bank's reserves. With a required reserve ratio of 0.2 (or 20%), each dollar of reserves supports $5 of deposits ($1 / 0.2 = $5). Therefore, a $10 million decrease in reserves can lead to a maximum decrease of $50 million in checkable deposits in the banking system.

Suppose the Fed Sells $10 Million in Government Securities to a Commercial