If the desired reserve ratio is one-third, currency in circulation is $300 billion, and chequable deposits are $900 billion, then the level of excess reserves in the banking system is ________.

Question

Quizplus · Accepted Answer

With a desired reserve ratio of one-third, banks need to hold $300 billion in reserves (one-third of $900 billion in chequable deposits). Since currency in circulation does not count towards bank reserves, the entire $300 billion in reserves must come from the deposits themselves. Therefore, there are no excess reserves, as the banks are holding exactly the amount required by the reserve ratio.

If the Desired Reserve Ratio Is One-Third, Currency in Circulation