The Fed buys $5050 million of securities from AIG, the desired reserve ratio is

Question

The Fed buys $5050 million of securities from AIG, the desired reserve ratio is 0.10.1 , and there is no currency drain. As soon as the open market purchase is made, the bank's excess reserves are $ 1.81.8 million. The maximum amount of loans that the banking system can create is ______, and the maximum amount of new money that it can create (not including the original deposit from AIG) is ______. A. $450450 million; $450450 million B. $450450 million; $500500 million C. $500500 million; $500500 million D. $500500 mil

Explanation / Answer

Option (B).

Maximum amount of new loans ($ Million) = Fed's purchase x (1 - Reserve ratio) / Reserve ratio

= 50 x (1 - 0.1) / 0.1

= 50 x 0.9 / 0.1

= 450

Maximum amount of money created ($ Million) = Fed's purchase / Reserve ratio

= 50 / 0.1

= 500

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