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The Fed buys $10 million of securities from AIG. AIG has a desired reserve ratio of 0.05, and there is no currency drain. As soon as the open market purchase is made, the bank's excess reserves are at
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The Fed buys $10 million of securities from AIG. AIG has a desired reserve ratio of 0.05, and there is no currency drain.

As soon as the open market purchase is made, the bank's excess reserves are at $___ million

User RockyFord
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1 Answer

22 votes
22 votes

Answer:

$200,000,000

Step-by-step explanation:

Given that:

Amount of securities purchased = $10 million

Desired reserve ratio = 0.05

The bank's excess reserve :

Money multiplier * amount of securities purchased

Money multiplier = 1 / reserve ratio

Money multiplier = 1 / 0.05 = 20

Excess reserve = 20 * $10,000,000

Excess reserve = $200,000,000

User Polara
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