Question

Phil Frugal has been saving his pennies since he was 5 years old. He is now 45 and deposits his savings in a bank. His pennies total $5,000. Using this information and your knowledge of the banking system, select the best match for each item. Then calculate the values of reserves, required reserves, and excess reserves. Assume a required reserve ratio of 10%.

a. The amount of interest the bank must charge on a loan
b. The amount of funds banks must, by law, hold in reserve
c. The amount a bank has on hand to fulfill the cash demands of its customers and the reserve requirements of the Fed
d. The amount of reserves the bank owes to other banks
e. The maximum amount of reserves available for loans
f. The amount of reserves the bank must set aside to loan to member banks

WORD BANK:
required reserves
excess reserves
reserves
none of these

Enter the values of reserves, excess reserves, and required reserves.
Reserves: $__________
Excess reserves: $___________
Required reserves: $____________

Answer 1

a. The amount of interest the bank must charge on a loan

none of these

b. The amount of funds banks must, by law, hold in reserve

required reserves

c. The amount a bank has on hand to fulfill the cash demands of its customers and the reserve requirements of the Fed

reserves

d. The amount of reserves the bank owes to other banks

none of these

e. The maximum amount of reserves available for loans

excess reserves

f. The amount of reserves the bank must set aside to loan to member banks

none of these

Enter the values of reserves, excess reserves, and required reserves.

Reserves: $5000

Excess reserves: $4500

Required reserves: $500

Step-by-step explanation:

Reserves refer are the cash a bank keeps on hand to meet the cash demands of customers and the deposits the bank holds at the Fed. In this case, reserves amount to $5,000.

Required reserves are the portion of reserves banks are required by law to keep in their vaults or on deposit at the Fed. Banks are not permitted to loan required reserves. A required reserve ratio of 10%, as given in the problem, means that 10% of Phil's deposit of $5,000 must be set aside by the bank.

Excess reserves are the reserves left over after the bank has taken out required reserves. This is the maximum amount a bank can loan out to borrowers. In this case, the bank has

Required reserves on deposit=deposit × reserve ratio=$5000×0.10=$500

Excess reserves=$5000−$500=$4500