If a Bank Sells a $1,000 Security to the Fed

question 18

Multiple Choice

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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Definitions:

Compensating Balances

Minimum cash balances that a business agrees to maintain in its account as part of a loan agreement, often used to reduce the lender's risk.

Pledging Agreement

An agreement where a borrower pledges an asset as collateral to secure a loan, ensuring the lender can seize the asset if the loan defaults.

Warehousing

In finance, a method of securing the lender’s interest when borrowing is secured by inventories. The inventory is placed in a warehouse operated by a third party. When it is drawn out of the warehouse by the borrower, a pro rata share of payment on the loan is due.

Legal Control

The power or authority to direct the management and policies of a company or organization, typically through ownership of voting shares or by contract.