Question

a bank has excess reserves of $100,000 and demand deposit liabilities of $1,00,000 when the required reserve ration is 25%. if the reserve ratio is reduced to 15% what will be the new level of this banks excess reserves

Answer 1

Given that the bank has excess reserves of $100,000 and demand deposit liabilities of $1,000,000. Since the required reserve ration is 25%, required reserves are 250,000. Total reserves are 350,000 and so desired reserve ratio is 350,000/1,000,000 = 35%.

if the reserve ratio is reduced to 15%, required reserves will be 150,000. Since total reserves should be 350,000 for deposits of 1,000,000, new level of this banks excess reserves are 350,000 - 150,000 = $200,000.