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 bankʹs excess reserves are
A) $400 million.
B) $50 million.
C) 0.
D) $450 million.

Question

Quizplus · Accepted Answer

The initial reserve ratio is 20% ($100 million reserves / $500 million deposits). With a new desired reserve ratio of 10%, the bank needs only $50 million in reserves ($500 million deposits * 10%). Thus, the excess reserves are $100 million - $50 million = $50 million.

Suppose That a Bank Begins with $500 Million in Deposits