If the Fed buys a $100,000 government security from a bank when the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent,the bank can loan a maximum of
A)$50,000.
B)$40,000.
C)$100,000.
D)$90,000.
E)$60,000.

Question

Quizplus · Accepted Answer

When the Fed buys a $100,000 security, the bank's reserves increase by $100,000. With a 10% reserve ratio, the bank must keep $10,000 in reserves, allowing it to loan out $90,000. The currency drain ratio affects the money multiplier, not the initial loan amount.

If the Fed Buys a $100,000 Government Security from a Bank