How Does Wells Fargo Increase Its Loans After Fed's Purchase of Treasury Bills?
Understanding the Scenario
Answer:
$92 millionExplanation:
Money received from the central bank - reserve = $100 million - $8 million = $92 million Therefore, Wells Fargo is able to increase its loans by $92 million. After the Fed's purchase of Treasury bills, Wells Fargo can increase its loans by $92 million, as it keeps 8% or $8 million in reserve and loans out the remaining 92%.Final Answer:
After the Fed's purchase of Treasury bills, Wells Fargo can increase its loans by $92 million, as it keeps 8% or $8 million in reserve and loans out the remaining 92%.Explanation:
The question pertains to how the banking system can increase its loans after the Federal Reserve purchases Treasury bills from it. Given the required reserve ratio of 8%, when the Fed purchases $100 million in Treasury bills from Wells Fargo, the bank receives $100 million in reserves. According to the reserve requirement, Wells Fargo needs to keep 8% (which is $8 million) of this amount as reserves and can loan out the remaining 92%. Therefore, Wells Fargo is able to increase its loans by $92 million, not by $8 million, $100 million, or $1.25 billion.How does the required reserve ratio affect the ability of banks to increase their loans?
The required reserve ratio determines the percentage of deposits that banks must keep as reserves and the percentage that can be loaned out. When the Fed purchases securities from banks, it injects reserves into the banking system, allowing banks to increase their lending capacity based on the reserve ratio. Hence, a lower reserve ratio enables banks to lend out more money and increase loans, while a higher ratio restricts their ability to do so.