A bank has excess reserves of $6000 and demand deposit liabilities of $100,000 when the desired reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be ________.

Question

Quizplus · Accepted Answer

The current level of required reserves can be calculated as 20% of $100,000 = $20,000.

The bank's current excess reserves are $6,000, which means they have $14,000 in required reserves ($20,000 - $6,000).

If the reserve ratio is raised to 25%, then the new required reserves will be 25% of $100,000 = $25,000.

To meet the new required reserves, the bank will need to hold an additional $11,000 in reserves ($25,000 - $14,000).

Since the bank already has $6,000 in excess reserves, they only need to add $5,000 more, which means their new excess reserves will be $1,000 ($6,000 - $5,000).

A Bank Has Excess Reserves of $6000 and Demand Deposit