If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent:

A) the bank has $1,000 in additional excess reserves,of which it can lend $800.
B) the bank has $1,000 in additional excess reserves,all of which it can lend out.
C) the bank has lost an asset and must reduce its loans.
D) the bank has lost a liability.
E) there is no change in excess reserves,since net assets do not change.

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Leslie Rodriguez · Accepted Answer

Final Answer : A, Explanation :  When the bank sells a security to the Fed, it gains reserves equal to the purchase price of the security. In this case, the bank gains $1,000 in reserves. However, it must hold 20% of these reserves as required reserves, leaving the remaining 80% as excess reserves. Therefore, the bank has $800 in excess reserves that it can lend out.

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