Question

If a bank has 10 million of demand deposits, a desired reserve ratio of 10 percent, and it holds 2 million in reserves, then it will not have enough reserves to support a deposit outflow of ________.

1) 1.2 million
2) 1.1 million
3) 1 million
4) 900,000

Answer 1

If a bank has demand deposits of 10 million and a desired reserve ratio of 10%, but only holds 2 million in reserves, it will not have enough reserves to support a deposit outflow of 1 million.

Step-by-step explanation:

In the given scenario, the bank possesses demand deposits totaling 10 million and maintains a desired reserve ratio of 10 percent. The desired reserve ratio signifies the portion of deposits that a bank aims to retain as reserves. To calculate the desired reserves, one multiplies the demand deposits by the desired reserve ratio: \(10 \, \text{million} \times 10\% = 1 \, \text{million}\). However, the bank currently holds only 2 million in reserves, falling short of the desired reserves of 1 million.

This discrepancy implies that the bank lacks adequate reserves to sustain a potential deposit outflow of 1 million. In the context of banking operations, maintaining sufficient reserves is crucial for meeting withdrawal demands from depositors and ensuring the stability and liquidity of the financial institution. The shortfall in reserves could pose challenges in managing unforeseen variations in deposit levels and may necessitate corrective measures to align the reserve position with the desired reserve ratio.

The correct answer is 3) 1 million.