Question

The Fed buys $10 million of securities from AIG. AIG has a desired reserve ratio of 0.05, and there is no currency drain.
As soon as the open market purchase is made, the bank's excess reserves are at $___ million

Answer 1

Answer:

$200,000,000

Explanation:

Given that:

Amount of securities purchased = $10 million

Desired reserve ratio = 0.05

The bank's excess reserve :

Money multiplier * amount of securities purchased

Money multiplier = 1 / reserve ratio

Money multiplier = 1 / 0.05 = 20

Excess reserve = 20 * $10,000,000

Excess reserve = $200,000,000