Answer the question on the assumption that the legal reserve ratio is 20 percent. suppose that the fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. as a result of the given transactions, excess reserves in the banking system will

 The excess reserves in banking system remains unchanged.

Explanation:

(1) Fed sells $500 of government securities to commercial bank, so commercial pays $500 to fed, $500 debited from commercial bank (paid out of reserves).

(2) Now, fed buys $500 securities from individuals, and individuals deposited that amount into checking accounts. So, banks will receive $500.

Hence, purchase of securities is offset by the checkable deposits it receives from individuals. So, excess reserves in the banking system will remains unchanged.

a. money supply  

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