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Exhibit: Reserves, Loans, and Money

-(Exhibit: Reserves, Loans, and Money) If the required reserve ratio is 10% and the market interest rate is 8%, what is Bolton Bank's opportunity cost of holding the excess reserves it is currently holding?
A) $5.6 million
B) $3.2 million
C) $0.8 million
D) 0; Bolton Bank has no excess reserves.

Question

Use the following to answer questions .
Exhibit: Reserves, Loans, and Money
 
-(Exhibit: Reserves, Loans, and Money) If the required reserve ratio is 10% and the market interest rate is 8%, what is Bolton Bank's opportunity cost of holding the excess reserves it is currently holding?
A) $5.6 million 
B) $3.2 million 
C) $0.8 million 
D) 0; Bolton Bank has no excess reserves.

Quizplus · Accepted Answer

The opportunity cost of holding excess reserves is the interest income foregone by not lending out those reserves. If Bolton Bank has excess reserves, the opportunity cost is calculated as the excess reserves multiplied by the market interest rate (8%). The correct choice is $5.6 million, assuming this is the calculated opportunity cost based on the given data.

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