Question

BOX 2: Take the following information as true Balance Sheet for First National Bank: Assets Liabilities Reserves $100,000 Deposits $500,000 Loans $400,000 7.

1. Refer to Box 2. The reserve ratio is 5%. First National Bank has excess reserves equal to:
(a) $0
(b) $25,000
(c) $50,000
(d) $75,000
(e) $100,000

Answer 1

Given a reserve ratio of 5% and total deposits of $500,000, the First National Bank's required reserves are $25,000. Since it holds actual reserves of $100,000, its excess reserves are calculated to be $75,000.

Step-by-step explanation:

To answer the question regarding First National Bank's excess reserves, we need to use the given reserve ratio and the total deposits. The reserve ratio is 5%, and the total deposits are <$500,000>. Therefore, the required reserves would be 5% of $500,000, which is $25,000. First National Bank actually holds $100,000 in reserves. To find the excess reserves, we subtract the required reserves from the actual reserves:

$100,000 (actual reserves) - $25,000 (required reserves) = $75,000 (excess reserves).

So, the correct answer is (d) $75,000.