Question

A bank with $1 billion in deposits holds $70 million in cash, $80 million on deposit with the Fed, and owns $100 million in government securities. If a fall in the reserve requirement ratio generates excess reserves of $30 million, and prior to the change the bank had no excess reserves, then the former reserve ratio was _________ and the new reserve ratio is _________.

a. 15 percent; 12 percent
b. 25 percent; 20 percent
c. 15 percent; 10 percent
d. 25 percent; 22 percent

Answer 1

15 percent; 12 percent

Step-by-step explanation:

Reserves is defined as the required amount that a bank must hold in its vault and at the nearest Federal Reserve bank. It is a proportion of the total deposits that customers have with the bank.

Reserve = Cash in vault + Cash with Federal Reserve

Reserve = 70 million + 80 million

Reserve= $150 million

Reserve ratio= (Reserve ÷ Total deposit) * 100

Reserve ratio= (150 million ÷ 1 billion) * 100

Reserve ratio= 15%

A fall in reserve requirement causes excess reserve of $30 million

New reserve= Old reserve - Excess reserve

New reserve= 150 million - 30 million= $120 million

New reserve ratio= (120 million ÷ 1 billion) * 100

New reserve ratio= 12%