Question

Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?

Answer 1

Total Deposits = $4937.5 billion

Step-by-step explanation:

given data

currently in reserves = $400 billion

reserve requirement = 8 percent

reserves amount = $5 billion

solution

first we get here Minimum Required Reserves that is express as

Minimum Required Reserves = Current Reserves - Excess Reserves .........................1

put here value we get

Minimum Required Reserves = $400 billion - $5 billion

Minimum Required Reserves = $395 billion

and

Total Deposits is express as

Total Deposits =
`(minimum\ required\ reserve)/(reserve\ required)` ......................2

Total Deposits =
`(395)/(0.08)`

Total Deposits = $4937.5 billion