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7 November, 13:51

Assume that the required reserve ratio for commercial banks is 25 percent. if the federal reserve banks buy $3 billion in government securities from commercial banks, we can say that, as a result of this transaction, the lending ability of the commercial banking system will:

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  1. 7 November, 13:59
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    To solve this problem, we should remember that the formula for reserve ratio is:

    r = reserves / demand deposits

    Where,

    r = reserve ratio

    reserves = $ 3 billion in government securities

    Therefore the demand deposits is:

    demand deposits = $ 3 billion / 0.25

    demand deposits = $ 12 billion

    Since $ 3 billion was bought, therefore the increase in the lending ability of the commercial banks is:

    $ 12 - $ 3 billion = $ 9 billion

    Answer:

    $ 9 billion
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