A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. Its current level of total reserves is _____. If the reserve requirement is increased to 25%, the new level of excess reserves would be _____.

Question

Quizplus · Accepted Answer

1. Current level of total reserves: 
Reserve requirement = 20%
Demand deposits = $40,000
Excess reserves = $4,000
Total reserves = Excess reserves / Reserve requirement 
Total reserves = $4,000 / 20% = $20,000 
Therefore, the current level of total reserves is $20,000.

2. New level of excess reserves: 
Reserve requirement is increased to 25% 
Demand deposits = $40,000 
Required reserves = Demand deposits x Reserve requirement 
Required reserves = $40,000 x 25% = $10,000 
Total reserves = Excess reserves + Required reserves 
$20,000 = Excess reserves + $10,000 
Excess reserves = $10,000 
Therefore, the new level of excess reserves is $10,000.

Therefore, the best choice is B as it correctly calculates the current and new levels of reserves.

A Bank Has Excess Reserves of $4,000 and Demand Deposits