Assuming a required reserve ratio of 5%,interest rate on reserves of 1%,and interest rate on loans of 6%,what is the effective cost of the reserve requirement on a $10,000 deposit?

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The effective cost of the reserve requirement is calculated by considering the opportunity cost of holding reserves instead of lending them out. With a 5% reserve requirement, $500 (5% of $10,000) must be held in reserves. The bank earns 1% interest on these reserves, but it could have earned 6% by lending the money out. The difference (6% - 1% = 5%) is the opportunity cost on the $500, which is $25. To find the effective cost as a percentage of the total deposit, divide $25 by $10,000, resulting in 0.25%.

Assuming a Required Reserve Ratio of 5%,interest Rate on Reserves