Question

Assume that a bank has a total deposit of $55,000 and the reserve ratio is 20%. What are the amounts of money that the bank will keep for itself and it will give out as loans?

A. The bank's fractional reserve is equal to $11,000, and the excess reserve is equal to $44,000.

B. The bank's fractional reserve is equal to $11,000, and the excess reserve is equal to $55,000.

C. The bank's fractional reserve is equal to $44,000, and the excess reserve is equal to $11,000.

D. The bank's fractional reserve is equal to $55,000, and the excess reserve is equal to $66,000.

E. The bank's fractional reserve is equal to $55,000, and the excess reserve is equal to $44,000.

Answer 1

With a total deposit of $55,000 and a 20% reserve ratio, the bank keeps $11,000 as required reserves and can loan out $44,000 as excess reserves. The correct answer is A.

Step-by-step explanation:

If a bank has a total deposit of $55,000 and the reserve ratio is 20%, the bank will keep a portion of these deposits as reserves and loan out the rest. The amount kept as reserves, often labeled as the required reserves or fractional reserves, is calculated as 20% of the total deposits. Therefore, the required reserves the bank will keep for itself is $11,000 (20% of $55,000).

The remaining amount, known as the excess reserves, is the portion of the deposits the bank can loan out. To calculate this, you subtract the required reserves from the total deposits, which gives us $44,000 ($55,000 - $11,000). So, the correct answer is A: The bank's fractional reserve is equal to $11,000, and the excess reserve is equal to $44,000.