Question

Consider a bank policy to maintain 12% of deposits as reserves. The bank currently has $10 million in deposits and holds $400,000 in excess reserves. What is the required reserve on a new deposit of $50,000?

Answer 1

Answer: $4,000

Step-by-step explanation:

The required reserve and the excess reserve held by the bank are different because the required reserve is imposed by the central bank and the excess reserve is done by the bank.

The 12% reserves the bank is holding are both the excess and required reserves.

This means that the excess reserve is;

= 400,000/10,000,000

= 4%

The required reserve ratio will therefore be;

= 12% - 4 %

= 8%

Required reserve on $50,000 will be;

= 8% * 50,000

= $4,000