Question

third national bank has reserves of $10,000 and checkable deposits of $100,000. the reserve ratio is 10 percent. households deposit $20,000 in currency into the bank, and the bank adds that currency to its reserves. what amount of excess reserves does the bank now have?

Answer 1

The reserve ratio is 10%, which means that the bank is required to hold 10% of checkable deposits as reserves. Given that the checkable deposits are $100,000, the required reserves are:

10% x $100,000 = $10,000

Since the bank already has reserves of $10,000, this means that it has met its reserve requirement before the deposit.

Now, when the households deposit $20,000 in currency, the bank adds that currency to its reserves, which means that its total reserves are now:

$10,000 (original reserves) + $20,000 (newly deposited currency) = $30,000

The excess reserves are the amount of reserves that the bank holds above its required reserve amount. In this case, the required reserves are $10,000, so the excess reserves are:

$30,000 (total reserves) - $10,000 (required reserves) = $20,000

Therefore, the bank now has $20,000 in excess reserves.