Question

in what form does a bank hold it's required reserves? assume the fed has 20 percent required reserve ratio. what amount of checkable deposits can be supported by the 10 million in required reserves

Answer 1

Banks hold their required reserves in the form of vault cash and deposits with the Federal Reserve.

When the Federal Reserve establishes a required reserve ratio, it mandates that banks must keep a certain percentage of their checkable deposits as reserves. This can be held in the form of physical cash in their vaults or as deposits with the Federal Reserve. For instance, if a bank has 10 million in required reserves and the required reserve ratio is 20%, it implies that the bank can support checkable deposits amounting to 50 million. This is calculated by dividing the required reserves (10 million) by the reserve ratio (20%) that is:

10,000,000 ÷ 20/100

10,000,000 × 100/20

100,000,000/20

50,000,000

In summary, banks maintain required reserves in the form of vault cash or deposits with the Federal Reserve. With a required reserve ratio of 20%, 10 million in required reserves enables the bank to support 50 million in checkable deposits, ensuring compliance with regulatory requirements.