The following balance sheet is for the First Edmonton Bank.Assume that the desired reserve ratio is 10%.All figures are in millions. Refer to the above information.Suppose that customers of this bank collectively write cheques for cash at the bank in the amount of $1 million.As a result, the bank's excess reserves diminish to:
A)$0
B)$6 million.
C)$9 million.
D)$9.1 million.

Question

The following balance sheet is for the First Edmonton Bank.Assume that the desired reserve ratio is 10%.All figures are in millions.  Refer to the above information.Suppose that customers of this bank collectively write cheques for cash at the bank in the amount of $1 million.As a result, the bank's excess reserves diminish to:
A)$0 
B)$6 million. 
C)$9 million. 
D)$9.1 million.

Quizplus · Accepted Answer

The desired reserve ratio is 10%, which means the bank is required to hold $10 million in reserves:
($80 million in deposits) x (reserve ratio of 10%) = $8 million required reserves
However, the bank's current reserves are $18 million, so it has $10 million in excess reserves:
$18 million current reserves - $8 million required reserves = $10 million excess reserves
When customers write $1 million in cheques, the bank's reserves will decrease by 10% of that amount, or $100,000:
$1 million in cheques x 10% reserve requirement = $100,000 decrease in reserves
Therefore, the bank's new excess reserves will be:
$10 million excess reserves - $100,000 decrease = $9.1 million
So the correct answer is D.

The Following Balance Sheet Is for the First Edmonton Bank