Question

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, reserves in the banking system will _________.
a. rise by $500.
b. remain unchanged.
c. fall by $500
d. fall by $100.

Answer 1

B.) Remain unchanged