A bank receives a demand deposit of $5,000.The bank loans out $3,500 of this deposit and increases its excess reserves by $500.What is the required reserve ratio?

Question

Quizplus · Accepted Answer

The bank increased its excess reserves by $500, which means that it must have kept $1,000 as required reserves (since the required reserve ratio is the portion of the deposit that banks are required to keep as reserves, and the excess reserves are the portion that they keep voluntarily). Therefore, the required reserve ratio must be 20%, because $1,000 is 20% of the original deposit of $5,000.

A Bank Receives a Demand Deposit of $5,000