A bank has $50,000 in deposits from its checking account customers and loans of $49,000. Of the $49,000 loaned out, $43,000 had remained in the checking accounts of the loan recipients but now has been withdrawn as cash by the loan recipients. The bank had $50,000 cash on hand prior to the remaining loan proceeds being converted to cash, and the reserve requirement is 25%. The reserve ratio for this bank after the remaining loan proceeds are converted to cash is _____, and it _____ meeting its reserve requirement.
A) 0.002%; is not
B) 14%; is not
C) 20%; is
D) 53.76%; is

Question

Quizplus · Accepted Answer

The reserve ratio is calculated as the ratio of the bank's reserves to its total deposits. After the loan recipients withdraw $43,000 in cash, the bank's cash on hand becomes $7,000 ($50,000 - $43,000). With total deposits of $50,000 and a reserve requirement of 25%, the bank is required to have $12,500 in reserves ($50,000 * 25%). However, with only $7,000 in reserves, the bank's actual reserve ratio is 14% ($7,000 / $50,000), which is below the required 25%, indicating the bank is not meeting its reserve requirement.

A Bank Has $50,000 in Deposits from Its Checking Account