Final answer:
The Federal Reserve selling $34 million in Treasury securities with a 25% reserve requirement and 10% excess reserves requires calculating the potential decrease in the money supply using the reciprocal of the reserve requirement, the money multiplier. However, considering excess reserves can complicate this calculation, and the current reserve requirements have been reduced to 0% due to the pandemic-induced recession as of March 2020.
Step-by-step explanation:
When the Federal Reserve sells $34 million in Treasury securities and the banking system has a required reserve ratio of 25%, assuming all currency is deposited into the banking system and banks hold excess reserves of 10%, the maximum amount by which the money supply can decrease is calculated using the money multiplier concept. The money multiplier is the reciprocal of the reserve requirement, which is 1 / 0.25 or 4 in this case. However, since banks are also holding excess reserves of 10%, this will affect the total lending capacity.
Nevertheless, this part of the question seems incomplete as it does not specify what is done with the excess reserves or how they interact with the required reserves. Traditionally, without considering excess reserves, if banks loan out every dollar that is not held in reserves, the sold securities would lead to a decrease in deposits, subsequently reducing the maximum lending capacity by $34 million times the money multiplier.
Before March 2020, reserve requirements were set at different percentages based on the total amount of deposits and were subject to annual adjustments by the Federal Reserve. However, following the pandemic-induced recession, these requirements have been reduced to 0%, which eliminates the reserve requirement for all depository institutions altogether.