Question

Suppose the reserve requirement is currently 15%.

Instructions: Enter your answers as a whole number.

a. Assume First Bank has deposits of $100 million. Calculate the required reserves for First Bank.

     $   million

b. At the end of the day, First Bank has $14 million of reserves. Will First Bank be a borrower or lender in the federal funds market?

     First Bank will   (Click to select)   borrow   lend  reserves of $   million in the federal funds market.

Answer 1

Required reserve ratio = 15% = 0.15

a. Deposits in First Bank = $100 million

Required reserves = Required reserve ratio * Deposits = 0.15 * $100 million = $15 million

Ans: $15 million

b. First Bank is said to have $14 million in reserves at the end of the day. The actual reserves fall short of required reserves($15 million) and hence, First Bank must borrow the deficit in reserve requirement i.e., $1 million from the federal funds market.

Ans: First Bank will borrow reserves of $1 million in the federal funds market.