ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$10, 000
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$2, 000
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$8, 000
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$0
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Detailed explanation-1: -If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can: decrease the money supply by up to $50 million.
Detailed explanation-2: -A reserve requirement of 20 percent means a bank must have $1, 000 of reserves if its checkable deposits are: $5, 000. The amount that a commercial bank can lend is determined by its: excess reserves.
Detailed explanation-3: -This means the bank has to reserve 20% of the deposits and can not use this fund for any commercial purpose. The other 80% can be used for commercial purposes, such as loans, lending, investments, etc.
Detailed explanation-4: -The maximum amount that the bank can lend is 2000 since reserves are 20 percent of the checkable deposit, which means that $20, 000 of reserves is to be maintained by the bank (20% of 1, 00, 000). Thus, the amount they can loan is 22, 000-20, 000=2000. This will increase the checkable deposits and loans by 2000.