Question

Suppose that Best National Bank currently has $50,000 in demand deposits and $32,500 in outstanding loans. The Federal Reserve has set the reserve requirement at 10%.

Reserves?:_________.
Required Reserves?:_______________.
Excess Reserves?:_______________.

Answer 1

(i) $17,500

(ii) $5,000

(iii) $12,500

Step-by-step explanation:

The current reserves of the Best National Bank:

= Demand deposits - outstanding loans

= $50,000 - $32,500

The current reserves of the Best National Bank = $ 17,500

Required reserves = 10%

Required reserves = Reserve requirement ratio × Demand deposits

= 0.10 × $50,000

= $ 5000

Excess reserves = Current reserves - Required reserves

= $ 17,500 - $ 5000

= $ 12,500