Answered: If the reserve ratio is 25%, and banks…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 2CQQ

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If the reserve ratio is 25%, and banks do not hold excess reserves, when the fed sells $40 million of bonds to the public, bank reserves

A. Increase by $40 million and the money supply eventually increases by $100 million

B. Increase by $40 million and the money supply eventually increases by $160 million

C. Decrease by $40 million and the money supply eventually decreases by $100 million

D. Decrease by $40 million and the money supply eventually decreases by $160 million

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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