Question

The reserve ratio is 10 percent. After the Fed buys \$1 million in U.S. government securities...

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

A.\$100,000.

B.\$900,000.

C.\$810,000.

D. \$1 million.

Ans: C) \$810,000

Explanation:

In the first transaction ;

Required reserve amount = 10% or \$1,000,000 = \$100,000

Excess reserve = \$1,000,000 - \$100,000 = \$900,000

Now the Bank A lends a construction company an amount equal to its excess reserves that is \$900,000.

In the second transaction;

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.

Required reserve amount = 10% or \$900,000 = \$90,000

Excess reserve = \$900,000 - \$90,000 = \$810,000

The maximum loan Bank A can now make is \$810,000

Earn Coins

Coins can be redeemed for fabulous gifts.