Question

Suppose the banking system has $50 billion in deposit liabilities and holds $5 billion in cash reserves. The desired minimum reserve ratio is 7%. Given their deposit liabilities, the banking system is holding _____________in excess cash reserves.

Answer 1

The banking system, with deposit liabilities of $50 billion and a 7% reserve ratio, must hold $3.5 billion in required reserves. Since they hold $5 billion, they have $1.5 billion in excess reserves.

Step-by-step explanation:

The student asked: Given the banking system has $50 billion in deposit liabilities and holds $5 billion in cash reserves, with a desired minimum reserve ratio of 7%, how much is the banking system holding in excess cash reserves?

First, we need to calculate the required reserves based on the deposit liabilities and the reserve ratio:

• Required reserves = Reserve ratio (7%) × Total deposits ($50 billion) = 0.07 × $50 billion = $3.5 billion

Since the banks are holding $5 billion in cash reserves, we subtract the required reserves from this amount to determine the excess reserves.

• Excess reserves = Cash reserves - Required reserves = $5 billion - $3.5 billion = $1.5 billion

Therefore, the banking system is holding $1.5 billion in excess cash reserves.