A bank has $50,000 in checking account deposits and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The amount of its excess reserves equals
A) $23,250.
B) $26,750.
C) $27,000.
D) $50,000.

Question

Quizplus · Accepted Answer

The bank's required reserves are 25% of $50,000 (the amount in checking account deposits), which equals $12,500. Since the bank has $50,000 cash on hand, its excess reserves are calculated by subtracting the required reserves from the total cash on hand: $50,000 - $12,500 = $37,500. However, since the bank has loaned out $49,000, and $43,000 of that remains in checking accounts, the actual reserve is the cash on hand minus the loans not deposited back into the banking system, which is $50,000 - ($49,000 - $43,000) = $44,000. Therefore, the excess reserves are $44,000 - $12,500 = $31,500. The correct answer is not listed, indicating a mistake in my calculation. Reevaluating correctly: the excess reserves should be calculated as the total cash on hand minus the required reserves based on the initial deposit, which is $50,000 - $12,500 = $37,500. My initial explanation contained a miscalculation by incorrectly adjusting for loans not redeposited. The correct approach is to simply subtract the required reserves from the cash on hand to find the excess reserves, without adjusting for the redeposited loans, as they do not affect the calculation of excess reserves directly.

A Bank Has $50,000 in Checking Account Deposits and Loans