Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is just meeting its desired reserve ratio. Now suppose a decrease in the required reserve ratio lowers the desired reserve ratio to 10 percent. After the fall in the desired reserve ratio but before the bank makes any changes, the bank's excess reserves are

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The bank initially has $100 million in reserves, which was 20% of $500 million in deposits. With the reserve ratio now at 10%, the required reserves are $50 million (10% of $500 million), leaving $50 million as excess reserves.

Suppose That a Bank Begins with $500 Million in Deposits