Question

f the Fed purchases​ $1 million worth of securities and the required reserve ratio is​ 8%, by how much will deposits change​ (assuming no change in excess reserves or the​ public's currency​ holdings)? A. rise by​ $8 million B. rise by​ $12.5 million C. decline by​ $1 million D. rise by​ $1 million

Answer 1

Answer:

D. rise by​ $1 million

Explanation:

For Fed if it purchases any security from any other bank then the balance of deposits will increase accordingly with such value in Fed.

As Fed is a central bank, it will be termed as reserves in the books of bank accordingly its reserves will increase as Fed has made investment in it.

Although, the deposits of Fed will also increase as because by purchasing the securities its cash in hand decreases and it tends to increase the deposits, by the same.

Therefore the deposits will increase by $1 million only.