Question

Suppose that Third National Bank has reserves of $20,000 and checkable deposits of $200,000. The reserve ratio is 10 percent. The bank sells $20,000 in securities to the Federal Reserve Bank in its district, receiving a $20,000 increase in reserves in return.

What level of excess reserves does the bank now have?

Answer 1

$18,000

Step-by-step explanation:

Original checkable deposits$200,000

Add new deposit $20,000

Total $220,000

Hence:

0.10×220,000

=$22,000 Amount reserve for the deposits

New actual reserve $40,000

($20,000 deposit added to the original reserves of $20,000)

Thus:

Excess reserves = actual reserves – required reserves

= $40,000 – $22,000

= $18,000

Therefore the level of excess reserves that the bank now have will be $18,000

Answer 2

The bank now have a level of reserve of $20,000

Step-by-step explanation:

According to given data we have the following:

Checkable deposits= $200,000.

reserve ratio=10$

Hence, 10 % of 200,000 =20,000,

New bank reserve is $40,000.

Therefore, in order to calculate the level of Excess reserve we have to make the following calculation:

Level of Excess reserve = $40,000 - $20,000 =$20,000

The bank now have a level of reserve of $20,000

Please note that Demand deposit on liability side does not change hence, 5000 has not been added