Question

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of

Answer 1

Answer:

$150 million

Explanation:

The reserve requirement is the amount of money required by the Fed for banks to keep as reserves.

If the reserve ratio is 25%, when the Fed buys securities of 200 million, the reserve would be 0.25 x 200 =$50 million

The amount that would be available for lending would be ($200 - $50) million = $150 million

Money supply would increase by a maximum of $150 million

I hope my answer helps you.