A bank currently holds $105 million in transaction deposits subject to legal reserves but has managed to enter into sweep account arrangements affecting $55 million of these accounts.Given that the bank must hold 3 percent legal reserves up to $47.8 million of transaction deposits and 10 percent legal reserves on any amount above that,how much has this bank reduced its total legal reserves as a result of these sweep arrangements?
A)$5.500 million
B)$1.449 million
C)$7.119 million
D)$1.619 million
E)None of the options is correct

Question

Quizplus · Accepted Answer

The bank has reduced its total legal reserves by $5.500 million as a result of these sweep arrangements.The bank is required to hold 3 percent legal reserves up to $47.8 million of transaction deposits and 10 percent legal reserves on any amount above that.Before the sweep arrangements, the bank was required to hold $1.434 million in legal reserves on the $47.8 million of transaction deposits subject to the 3 percent reserve requirement and $5.500 million in legal reserves on the remaining $57.2 million of transaction deposits subject to the 10 percent reserve requirement.After the sweep arrangements, the bank is only required to hold $1.434 million in legal reserves on the $47.8 million of transaction deposits subject to the 3 percent reserve requirement and $1.449 million in legal reserves on the remaining $8.2 million of transaction deposits subject to the 10 percent reserve requirement.Therefore, the bank has reduced its total legal reserves by $5.500 million as a result of these sweep arrangements.

A Bank Currently Holds $105 Million in Transaction Deposits Subject