Question

Assume that the required reserve ratio for commercial banks is 25 percent. if the federal reserve banks buy $3 billion in government securities from commercial banks, we can say that, as a result of this transaction, the lending ability of the commercial banking system will:

Answer 1

To solve this problem, we should remember that the formula for reserve ratio is:

r = reserves / demand deposits

Where,

r = reserve ratio

reserves = $ 3 billion in government securities

Therefore the demand deposits is:

demand deposits = $ 3 billion / 0.25

demand deposits = $ 12 billion

Since $ 3 billion was bought, therefore the increase in the lending ability of the commercial banks is:

$ 12 - $ 3 billion = $ 9 billion

 

Answer:

$ 9 billion