Question

Suppose a bank currently has $250,000 in deposits and $27,000 in reserves. The required reserve ration is 10% and assume there is an unexpected withdrawal of $4,000 in reserves. How much would the bank need to borrow in either the Fed Funds market or at the discount window, to be in compliance with the required reserve ratio?

Answer 1

To be in compliance with the required reserve ratio, the bank would need to borrow $2,000 either in the Fed Funds market or at the discount window.

Step-by-step explanation:

To determine how much the bank would need to borrow to be in compliance with the required reserve ratio, we first need to calculate the required reserves. Given that the bank currently has $250,000 in deposits and the required reserve ratio is 10%, the required reserves would be 10% of $250,000, which equals $25,000.

Since there was an unexpected withdrawal of $4,000 in reserves, the bank's reserves would now be $27,000 - $4,000 = $23,000. To be in compliance with the required reserve ratio, the bank would need to have $25,000 in reserves. Therefore, the bank needs to borrow $25,000 - $23,000 = $2,000 either in the Fed Funds market or at the discount window.