4. Working through an open-market operation
Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves.
Assets
Liabilities and Net Worth
(Billions of Dollars)
Total reserves 10 Checkable deposits 25
Loans 5
Securities 10
Total 25 Total 25
What is the required reserve ratio?
10%
5%
25%
40%
Suppose that the Federal Reserve (the "Fed") buys $3 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the initial impact of this transaction?
Checkable deposits rise by $3 million, and the banking system's holdings of securities rise by $3 million.
Checkable deposits rise by $3 million, and the banking system's total reserves rise by $3 million.
The banking system's holdings of securities fall by $3 million, and the banking system's total reserves rise by $3 million.
The banking system's holdings of securities rise by $3 million, and the banking system's total reserves fall by $3 million.
As a result of the Fed's purchase of $3 million of securities, checkable deposits in the banking system can potentially by as much as .