A bank receives a demand deposit of $5000.The bank loans out $3500 of this deposit and increases its excess reserves by $500.What is the desired reserve ratio?

Question

Quizplus · Accepted Answer

The desired reserve ratio can be calculated as follows:

Reserves = 5000 - 3500 = 1500 
Excess reserves = 1500 + 500 = 2000

Desired reserve ratio = Reserves / Demand deposit 
Desired reserve ratio = 1500 / 5000 = 0.3 or 30%

However, since the bank now has excess reserves, it means that its actual reserve ratio is higher than the desired reserve ratio. Therefore, the desired reserve ratio must be lower than 30%.

The only option that meets this requirement is B) 20%.

A Bank Receives a Demand Deposit of $5000