Question

Suppose the required reserve ratio is 10% and the banking system initially has no excess reserves. If $20 billion in new currency is deposited into the system, these new deposits will initially create excess reserves of: Group of answer choices $4 billion $200 billion $2 billion $18 billion $20 billion

Answer 1

$18 billion

Step-by-step explanation:

A required reserve ratio refers to the fraction of the deposits received by a bank or financial institution that the regulatory authority requires the bank to hold as reserves and not loaning it out.

Excess reserves refers to reserves that is above the required reserved which held by a bank or financial institution and can can be loaned out. Excess reserve is therefore total deposit minus required reserve.

Since the required reserve ratio is 10% from the question, initial required reserve for the bank can therefore be obtained as follows:

Initial required reserve = 10% * Deposits = 10% * $20 billion = $2 billion

As result, we have:

Initial excess reserve = Deposit - Required reserve = $20 billion - $2 billion = $18 billion

Therefore, these new deposits will initially create excess reserves of $18 billion.