Question

A bank has $400,000 in deposits and no excess reserves. The reserve ratio is 02 and a customer withdraws $10,000. To meet the reserve requirement, by how much must the bank increase its reserves?

Answer 1

After a customer withdraws $10,000 from a bank with a 2% reserve ratio, the bank must increase its reserves by $200 to meet the new reserve requirement.

Step-by-step explanation:

To calculate the change in required reserves after a customer withdraws $10,000 from a bank with a reserve ratio of 0.02 (2%), we first determine the initial required reserve before withdrawal. The required reserve is $400,000 * 0.02 = $8,000. After the withdrawal of $10,000, the new deposit amount is $400,000 - $10,000 = $390,000. The required reserve for the new deposit amount is $390,000 * 0.02 = $7,800.

Since the bank had no excess reserves and just enough to meet its initial required reserve (held $8,000), the withdrawal of $10,000 means that the bank now has to increase its reserves by the shortfall amount. The shortfall is the initial reserve ($8,000) minus the new required reserve ($7,800) which equals $200. Therefore, to meet the reserve requirement, the bank needs to increase its reserves by $200.