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Brittany deposits 20k in a commercial bank, which then sends the deposit to its account with the regional Federal Reserve Bank. If the reserve requirement is 5%, actual, required, and excess reserves increase by, respectively:

User Sugunan
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Final answer:

Actual reserves increase by $20,000, required reserves would be $1,000 (5% of $20,000), and excess reserves would be $19,000. These figures are calculated based on a 5% reserve requirement, although as of March 2020, the Federal Reserve has reduced reserve requirements to 0%.

Step-by-step explanation:

If Brittany deposits $20,000 into a commercial bank, which then sends the deposit to its account with the regional Federal Reserve Bank, and assuming a reserve requirement of 5%, then the actual reserves, required reserves, and excess reserves would increase by:

  • Actual reserves increase by the full amount deposited, so by $20,000.
  • Required reserves would be 5% of $20,000, which equals $1,000.
  • Excess reserves are the amount of reserves that exceed the required minimum. In this case, excess reserves are the actual reserves minus required reserves, which equals $20,000 - $1,000 = $19,000.

These reserves play a crucial role in the banking system, as they influence the amount a bank can lend and are a tool by which the Federal Reserve executes monetary policy.

Prior to March 2020, the Federal Reserve had different tiers for reserve requirements, but these were reduced to 0%, eliminating reserve requirements for all depository institutions in response to the COVID-19 pandemic.

When Brittany deposits $20,000 in a commercial bank, the bank is required to hold a certain percentage of the deposit as reserves. In this case, the reserve requirement is 5%. This means that the bank must keep 5% of the $20,000 deposit as reserves, which is $1,000.

So the actual reserves increase by $1,000. The required reserves also increase by $1,000 because the bank has to hold this amount as reserves. The excess reserves, which is the amount of reserves above the required amount, increase by $0 since the required reserves and actual reserves are equal.

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