Question

The Federal Reserve has set the reserve ratio at 10%. Your local bank has deposits of $150 million and

reserves of $20 million. How much in excess reserves is the bank holding?
zero
$130 million
O $15 million
O $5 million

Answer 1

The bank has $5 million in excess reserves, which is calculated by subtracting the required reserves ($15 million) from the actual reserves ($20 million).

Therefore, the bank is holding $5 million in excess reserves.

Step-by-step explanation:

The question is asking to calculate the amount of excess reserves a bank is holding given that the Federal Reserve has set the reserve ratio at 10%, the bank has deposits of $150 million, and reserves of $20 million.

To find out the excess reserves, we first calculate the required reserves: 10% of $150 million is $15 million. Since the bank has actual reserves of $20 million, we subtract the required reserves ($15 million) from the actual reserves ($20 million) to determine the excess reserves.

Excess reserves = Actual reserves - Required reserves
Excess reserves = $20 million - $15 million
Excess reserves = $5 million