Introduction to Finance

Federal Reserve fl oat 
temporary 
increase in bank reserves from 
checks credited to the reserve 
accounts of depositing banks 
but not yet debited to the reserve 
accounts of those banks from which 
the checks were drawn

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C H A PT E R 5 Policy Makers and the Money Supply
10 percent, it is possible to expand $800 of excess reserves to $8,000 of additional loans and depos-
its. When the reserve ratio is lowered, additional expansion also takes place because part of the 
required reserves becomes excess reserves. This process is reversed when the reserve ratio is raised.
Bank reserves are also aff ected by changes in the level of deposits of foreign central banks 
and governments at the Reserve Banks. These deposits are maintained with the Reserve Banks 
at times as part of the monetary reserves of a foreign country and may also be used to settle 
international balances. A decrease in such foreign deposits with the Reserve Banks increases 
bank reserves; an increase in them decreases bank reserves.
Treasury Transactions 
The transactions of the Treasury also aff ect bank reserves. 
They are increased by spending and making payments, and decreased when the Treasury 
increases the size of its accounts at the Reserve Banks. The Treasury makes almost all of its 
payments out of its accounts at the Reserve Banks, and such spending adds to bank reserves. 
For example, the recipient of a check from the Treasury deposits it in a bank. The bank sends 
it to the Reserve Bank for collection and receives a credit to its account. The Reserve Bank 
debits the account of the Treasury. When a Treasury check for $1,000 is deposited in Bank A 
and required reserves are 20 percent, the transactions may be summarized as follows:
1.
The deposits of Bank A are increased by $1,000, its required reserves by $200, and excess 
reserves by $800.