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12345 [234]
3 years ago
13

Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government

securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, excess reserves in the banking system will
Business
1 answer:
Vinil7 [7]3 years ago
8 0

Answer:  The excess reserves in banking system remains unchanged.

Explanation:

(1) Fed sells $500 of government securities to commercial bank, so commercial pays $500 to fed, $500 debited from commercial bank (paid out of reserves).

(2) Now, fed buys $500 securities from individuals, and individuals deposited that amount into checking accounts. So, banks will receive $500.

Hence, purchase of securities is offset by the checkable deposits it receives from individuals. So, excess reserves in the banking system will remains unchanged.

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