$2.$ Working through an open$-$market operation

Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves.

Assets

Liabilities and Net Worth

$($Billions of Dollars$)$

Total reserves$4$Checkable deposits$20$Loans$11$Securities$5$Total$20$Total$20$

What is the required reserve ratio?

$5\%$

$10\%$

$20\%$

$25\%$

Suppose that the Federal Reserve $($the $$Fed$)$ sells $$1\mathrm{.}5$ million of bonds to a bond dealer, who pays the Fed by writing a check against the funds in her checking account.

What is the initial$$impact of this transaction?

The banking system's holdings of securities fall by $$1\mathrm{.}5$ million, and the banking system's total reserves rise by $$1\mathrm{.}5$ million.

Checkable deposits fall by $$1\mathrm{.}5$ million, and the banking system's holdings of securities fall by $$1\mathrm{.}5$ million.

Checkable deposits fall by $$1\mathrm{.}5$ million, and the banking system's total reserves fall by $$1\mathrm{.}5$ million.

The banking system's holdings of securities rise by $$1\mathrm{.}5$ million, and the banking system's total reserves fall by $$1\mathrm{.}5$ million.

As a result of the Fed's sale of $$1\mathrm{.}5$ million of securities$,$ checkable deposits in the banking system can potentially$$by as much as$.$