Final answer:
The effective cost of the reserve requirement on a $10,000 deposit, with a 5% reserve ratio, is the difference in interest earnings between what the bank makes from required reserves and what it could have earned from lending out the reserves. The effective loss is $25 annually.
Step-by-step explanation:
The student is inquiring about the effective cost of the reserve requirement on a $10,000 deposit given a required reserve ratio of 5%, an interest rate on reserves of 1%, and an interest rate on loans of 6%. With a 5% reserve requirement, the bank must hold $500 (5% of $10,000) in reserves. This amount earns 1% interest, which is $5 per year.
However, the bank could have loaned out these $500 at a 6% interest rate, earning $30 instead. The difference between the potential earnings from loan interest and the actual earnings from reserve interest represents the opportunity cost of the reserve requirement. Thus, the effective cost to the bank is the lost interest of $25 ($30 - $5). It is important to note that the Federal Reserve's requirements have changed since early 2015, including a period during the pandemic when the reserve requirement was reduced to 0% for all depository institutions.