Question

Assume that the required reserve ratio is 5 percent. If a commercial bank has $2 million cash in its vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits, then its excess reserves equal:

A. $0 million
B. $2 million
C. $5 million
D. $6 million

Answer 1

The excess reserves of the bank with a 5 percent required reserve ratio, $2 million cash in vault, $1 million in government securities, $3 million on deposit at the Fed, and $60 million in checkable deposits is $2 million (Option B).

Step-by-step explanation:

To calculate excess reserves, we'll use the formula:

Excess Reserves = Total Reserves - Required Reserves

Total Reserves = Cash in vault + Deposits at the Fed

Given:

Cash in vault = $2 million

Deposits at the Fed = $3 million

Total Reserves = $2 million (cash in vault) + $3 million (deposits at the Fed) = $5 million

Now, to find the required reserves:

Required Reserves = Required Reserve Ratio × Checkable deposits

Required Reserves = 0.05 (5% as the required reserve ratio) × $60 million (checkable deposits)

Required Reserves = $3 million

Excess Reserves = Total Reserves - Required Reserves

Excess Reserves = $5 million (Total Reserves) - $3 million (Required Reserves)

Excess Reserves = $2 million

Therefore, the bank's excess reserves are:

B. $2 million