Table 9-3
Balance Sheet of the Alpha-Beta Bank
(All figures in $ million)

-Refer to Table 9-3. If the required reserve ratio is 10% and the market interest rate is 6%, then the opportunity cost of holding excess reserves is
A) zero since Alpha-Beta does not hold any excess reserves.
B) $0.9 million.
C) $2.4 million.
D) $4 million.

Question

Table 9-3
Balance Sheet of the Alpha-Beta Bank
(All figures in $ million)
 
-Refer to Table 9-3. If the required reserve ratio is 10% and the market interest rate is 6%, then the opportunity cost of holding excess reserves is
A) zero since Alpha-Beta does not hold any excess reserves. 
B) $0.9 million. 
C) $2.4 million. 
D) $4 million.

Quizplus · Accepted Answer

The opportunity cost of holding excess reserves is the interest that could have been earned on those reserves if they had been loaned out. In this case, the required reserve ratio is 10%, so Alpha-Beta is required to hold $10 million in reserves. However, Alpha-Beta is actually holding $12.4 million in reserves, so it is holding $2.4 million in excess reserves. The market interest rate is 6%, so the opportunity cost of holding these excess reserves is $2.4 million * 0.06 = $0.144 million.

Table 9-3 Balance Sheet of the Alpha-Beta Bank