Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is just meeting its desired reserve ratio. Now suppose a decrease in the required reserve ratio lowers the desired reserve ratio to 10 percent. After the fall in the desired reserve ratio but before the bank makes any changes, the bank's unplanned reserves are
A) 0.
B) $400 million.
C) $450 million.
D) $50 million.

Question

Quizplus · Accepted Answer

The bank initially has $100 million in reserves, which was 20% of $500 million in deposits. With the new desired reserve ratio of 10%, the bank only needs $50 million in reserves. Therefore, the unplanned reserves are $100 million - $50 million = $50 million.

Suppose That a Bank Begins with $500 Million in Deposits