The table below shows the balance sheet of Eubank.If the interest rate on loans is 10 percent,the annual cost to Eubank of holding excess reserves is:
Table 14.1
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EUBANK
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$$\begin{array} { | l | r | r | r | }
\hline \text { Assets } & { \text { Liabilities and Net Worth } } & \
\hline & & & \
\hline \text { Deposits at the Fed } & \$ 40,000 & \text { Checkable deposits } & \$ 500,000 \
\hline \text { Cash } & \$ 10,000 & \text { Net Worth } & \$ 20,000 \
\hline \text { Loans } & \$ 300,000 & & \
\hline \text { Securities } & \$ 150,000 & & \
\hline \text { Fed Stock } & \$ 20,000 & & \
\hline
\end{array}$$

Question

The table below shows the balance sheet of Eubank.If the interest rate on loans is 10 percent,the annual cost to Eubank of holding excess reserves is:
Table 14.1
?
EUBANK
?
$$\begin{array} { | l | r | r | r | } 
\hline \text { Assets } &  { \text { Liabilities and Net Worth } } & \
\hline & & & \
\hline \text { Deposits at the Fed } & \$ 40,000 & \text { Checkable deposits } & \$ 500,000 \
\hline \text { Cash } & \$ 10,000 & \text { Net Worth } & \$ 20,000 \
\hline \text { Loans } & \$ 300,000 & & \
\hline \text { Securities } & \$ 150,000 & & \
\hline \text { Fed Stock } & \$ 20,000 & & \
\hline
\end{array}$$

Quizplus · Accepted Answer

The annual cost of holding excess reserves is calculated by applying the interest rate to the amount of excess reserves. Since the question specifies a 10 percent interest rate, the correct answer involves applying this rate to the excess reserves, not to the total deposits, net worth, or any other figure.

The Table Below Shows the Balance Sheet of Eubank A)10 Percent of $500,000