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Economics
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Suppose the Federal Reserve System has a required reserve ratio of 0.20 and there are no excess reserves in the system. If the Open Market Committee buys $20 million of securities from the commercial banking system, the total lending capacity of the system

1. Increases by $20 million.

2. Decreases by $20 million.

3. Increases by $100 million.

4. Decreases by $100 million.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019
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Related questions

1. If the Fed sells $20 million worth of government bonds to the public (open market sale), will the lending capacity on the banking system increase or decrease? By how much will the money supply change? Assume the required reserve ratio to be 0.1.

1. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply(decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4. If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much?

 

Explain using a T-account if necessary:
If the Fed buys from Chase $30 million of government securities, the required reserve ratio is 10%, individuals do not hold currency, and bank does not hold excess reserves, will there be a maximum increase in the money supply by the banking system as the result of the Fed purchase?

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