Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n)
A) injection of $10,000 in new reserves.
B) reduction of $50,000 in reserves.
C) injection of $50,000 in new reserves.
D) injection of $2,000 in new reserves.

Question

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When the Federal Open Market Committee buys a $10,000 bond, it pays the seller by transferring $10,000 to the seller's bank account. This money, which comes from the Fed's account with a commercial bank, becomes reserves held by the bank. Because the reserve requirement is 20%, the bank is required to hold $2,000 of these reserves and can lend out the remaining $8,000. Therefore, the impact on the banking system is an injection of $10,000 in new reserves.

Assume That the Reserve Requirement Is 20% and the Federal