Question

In: Economics

  Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A...

 

Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?

Selected Answer: c.

$27,000

Answers: a.

$9,000

  b.

$26,190

  c.

$27,000

   

Solutions

Expert Solution

Option C is correct.

When the bank sells off treasury bill to the Fed, it gets money/cash in return. This money completely can be lent out in the form of loans. Total amount that bank can lent out is = $18000 + $9000 = $27000.


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