Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio often percent. Given this information, we can say First National Bank has million dollars in excess reserves. A) one B) two C) nine D) ten
Question
Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio often percent. Given this information, we can say First National Bank has million dollars in excess reserves. A) one B) two C) nine D) ten
Solution
The correct answer is C) nine. Here's how we get to that:
First, we need to understand what excess reserves are. Excess reserves are any cash over and above the required reserves that a bank chooses to hold.
In this case, First National Bank has a total of 1 million in required reserves. This means that the bank has 2 million - $1 million) left over after meeting its required reserves.
However, the bank faces a required reserve ratio of 10 percent. This means that for every dollar the bank has in deposits, it needs to hold 10 cents in reserves.
So, if the bank has 10 million in deposits ($1 million / 10%).
Given that the bank has 2 million in vault cash, the bank has 10 million - $2 million) in excess reserves.
But, the bank also has 9 million (1 million).
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