Question

Assume that the reserve requirement for the commercial banks is 25%. If the Federal Reserve Banks buy $3 billion in government securities, the lending ability of the commercial banking system will increase by _____.

Answer 1

Answer:

The lending ability will increase by $2.25 billion.

Explanation:

The reserve requirement is given at 25%.

If federal reserve bank buys $3 billion in government securities, the total reserve will increase by $3 billion.

The excess reserve will be

=Increase in total reserve-required reserve

=$3 billion-25% of $3

=$(3 billion- .25*3) billion

=$(3-0.75) billion

=$2.25 billion