Question

Third National Bank has reserves of $10,000 and checkable deposits of $100,000. The reserve ratio is 10 percent. Households deposit $5,000 in currency into the bank and that currency is added to reserves.

Instructions: Enter your answer as a whole number.

What level of excess reserves does the bank now have? $.

Answer 1

Current Checkable deposit = 100,000 and Now suppose Household deposits 5000 into the Bank. Thus total deposits = 105,000. It is given that Reserve ratio = 10% i.e. Bank must have to keep 10% of this deposits as reserves and can use rest of them however they want. When they hold more money than reserve amount(amount they must hold), that extra amount they hold is called excess reserve.

Here Reserve ratio = 10% and Total deposits = 105,000.

Hence amount they must hold = 10% of 105,000 = 10,500. But they are holding 10,000 + 5000 = 15,000(Note it is given that this 5000 currency is added to reserves).

Hence Excess reserve = amount they hold - reserve amount = 15,000 - 10,500 = 4500.

Hence, The level of excess reserves, the bank now have $4500