Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent.If the Federal Reserve reduces the required reserve ratio to 15 percent,then the bank will now have excess reserves of

Question

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When the Federal Reserve reduces the required reserve ratio from 20% to 15%, the bank's required reserves on $100 million in deposits decrease from $20 million (20% of $100 million) to $15 million (15% of $100 million). Since the bank initially held exactly the amount required (20% of $100 million = $20 million), reducing the requirement to 15% frees up $5 million ($20 million - $15 million) in excess reserves.

Suppose a Bank Has $100 Million in Checking Account Deposits