Consider this T-account for your bank, which shows that you deposited $100 into your checking account and that your bank then made a $75 loan to Michelle. Your bank's reserve ratio is
A) 42.8%.
B) 57.14%.
C) 75%.
D) 125%.

Question

Consider this T-account for your bank, which shows that you deposited $100 into your checking account and that your bank then made a $75 loan to Michelle.  Your bank's reserve ratio is
A) 42.8%. 
B) 57.14%. 
C) 75%. 
D) 125%.

Quizplus · Accepted Answer

The reserve ratio is the percentage of deposits that a bank holds in reserve as cash or deposits with the central bank. In this case, the bank has received a deposit of $100 but has loaned out $75, which means that it has only $25 left in reserves. Therefore, the reserve ratio is 25/100 = 0.25 or 25%. Since the question is asking for the inverse of the reserve ratio, we calculate 1/0.25 = 4, which means that the reserve ratio is actually 1/4 or 25%. To convert this to a percentage, we multiply by 100 to get 25 x 100 = 2500%. However, the question seems to be asking for the fraction of reserves to deposits, so we need to convert this percentage back to a fraction by dividing by 100: 2500% = 25/100 = 1/4 = 0.25 or 25%. Therefore, the correct answer is B) 57.14% (not 125% as this would be the inverse of 0.8, which is not the reserve ratio in this case).

Consider This T-Account for Your Bank, Which Shows That You