The reserve ratio is 10 percent. After the Fed buys $1 million in U.S. government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A, Bank A lends a construction company an amount equal to its excess reserves. The construction company spends the entire amount on lumber from a lumber yard, which deposits the construction company's check in its deposit account with Bank A. The maximum loan Bank A can now make is

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When the Fed buys $1 million in government securities, the reserves of the banking system increase by $1 million, but only by $900,000 for Bank A since it must hold back 10 percent as required reserves (10% of $1 million is $100,000). Bank A can lend out the remaining $900,000 as excess reserves. When the construction company deposits the check for $900,000, Bank A's deposits increase by $900,000, and its required reserves increase by $90,000 (10% of $900,000). This leaves Bank A with excess reserves of $810,000 ($900,000 - $90,000), which it can lend out as a new loan. Therefore, the maximum loan Bank A can now make is $810,000.

The Reserve Ratio Is 10 Percent