Scenario 13.1 Assume the following conditions hold.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks.This acts to lower the equilibrium interest rate by 2 percent. Refer to Scenario 13.1.What is the change in required reserves following the open market operation by the Fed?
A)+$0.33 billion
B)-$0.33 billion
C)+$0.67 billion
D)-$0.67 billion
E)+1.0 billion

Question

Scenario 13.1 Assume the following conditions hold.
 Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks.This acts to lower the equilibrium interest rate by 2 percent.  Refer to Scenario 13.1.What is the change in required reserves following the open market operation by the Fed?
A)+$0.33 billion 
B)-$0.33 billion 
C)+$0.67 billion 
D)-$0.67 billion 
E)+1.0 billion

Quizplus · Accepted Answer

The change in required reserves can be calculated using the following formula:
Change in required reserves = Change in deposits × Reserve ratio
Since the $1 billion in deposits created by the bond purchase will be deposited in the banks, the change in deposits is also $1 billion. Assuming a reserve ratio of 0.33 (based on the required reserve ratio of 10% for banks with more than $16.3 million in deposits), the change in required reserves is:
$1 billion × 0.33 = $0.33 billion
Therefore, the correct answer is A.

Scenario 13.1 Assume the Following Conditions Hold