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1. What is the reserve requirement? A. 25% B. 5% C. 10% D. 40% 2. Suppose the fe

ID: 1201904 • Letter: 1

Question

1. What is the reserve requirement? A. 25% B. 5% C. 10% D. 40%
2. Suppose the federal reserve buys $10 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the INITIAL impact of this transaction? A. The banking systems holdings of securities fall by $10 million and the banking systems total legal reserves rise by $10 million. B. The banking systems holdings of securities rise by $10 million and the banking systems total legal reserves fall by $10 million C. Deposits rise by $10 million and the banking systems holdings of securities rise by $10 million D. Deposits rise by $10 million and the banking systems total legal reserves rise by $10 million.
3. As a result of the federal reserves purchase of $10 million of bonds (securities), deposits in the banking system can potentially _____(increase/decrease) by as much as _____ A. $40 million B. $13.33 million C. $160 million D. $10 million
Assets Liabilities and Net Worth Total reserves Loans Securities Total $40 billion 50 billion 70 billion $160 billion Deposits $160 billion Total $160 billion

Explanation / Answer

Answer 1:

Cash Reserve ratio = 100 * 40 / 160 = 25 per cent.

= 100 * reserves / Total Deposits

Answer 2:

Option C, Deposits and securities will rise by $10 million

Answer 3 :

Increase, 1 / CRR * $ 10 million = 40 million Option A