Question

If a bank has reserves of $20 million and demand deposits of $200 million, how much are the bank’s a. required reserves? B. excess reserves?

Answer 1

The Total Reserves (R) of a bank are the sum of Required Reserve (RR) and Excess Reserve (ER) that is,

R = RR + ER - equation-1

RR are a percentage of total demand deposits

RR = required reserve ratio (r) X total demand deposits (D)

substituting value of RR in equation-1,

R = (r*D) + ER - equation-2

In the above question, R = 20 and D = 200

substituting these values in equation-2,

20 = (r*200) + ER

In the above equation, there are 2 variables and one equation. Hence, value of both cannot be found out, additional information will be needed.