Question

Suppose that the first national bank currently holds a total of 10 million dollars in deposits from over 120,000 clients. At the same time, the total amount of loans people owe the bank is 2 million dollars. Assume that the bank currently has 2 million dollars in cash and 1 million dollars worth of securities invested in the financial market. The bank also owns some physical assets, such as its office building. What is the amount of excess reserve (in millions) held by the bank if the reserve ratio is 0.08?

Round your answer to 2 digits after the decimal point. If your answer is 1.23 millions, type 1.23 as your answer, not 1,230,000

Answer 1

From the given data we can conclude:

Total Reserves = checking account - Loans - Cash - Securities

= 10 - 2 - 2 - 1

= 5 million.

Given, Reserve ratio = 0.08

Now, we get,

Required Reserves = Reserves ratio * Checking account deposit = 0.08*10 million = 0.8 million

Therefore,

Excess reserves = Reserves - Required Reserves =  5 million - 0.8 million = 4.2 million

Excess reserves = 4.20 million.

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