Question

If the Fed purchases​ $50,000 in Tminusbills from a​ bank, by how much will the​ bank's excess reserves​ increase? A. by​ $50,000 B. by​ $50,000 times the required reserve ratio C. by​ $50,000 divided by the required reserve ratio D. not enough information has been provided to answer the question.

Answer 1

Answer:

A. by​ $50,000

Explanation:

When the bank purchases the T-bills then its investment increases by the same amount that is by $50,000.

From the bank from which the treasury bill is purchased, their reserves will increase by $50,000. This is because of the nature of Fed, as it is central bank any investment made by the central bank will be a reserve for the bank in which investment is made.

As the amount held by Fed is considered, to be a deposit, even against it Fed holds a security.