Answer:
This will increase the required reserve by $1 million
Explanation:
The central bank uses the purchase and sale of treasury bills to regulate money in the economy. When the central bank makes a purchase of treasury bills, then the amount of money available to banks for distribution is always increased. However, when the central bank sells treasury bills, the amount of money in the economy is reduced.
In our case, the purchase will increase the amount of money available in the economy and in turn increase the required reserve ratio.
The required reserve can be expressed as;
RR=E×T
where;
RR=required reserve
E=reserve ratio
T=treasury bills purchased
In our case;
RR=unknown
E=20%
T=$5 million
replacing;
RR=(20/100)×5=1 million
This will increase the required reserve by $1 million
