Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank ﬁnds that it can safely lend out $4,500, the reserve requirement must be

Question

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The bank can safely lend out $4,500, which means that it needs to hold back 10% of the deposit ($5,000 x 0.10 = $500) as required reserves. Therefore, the reserve requirement must be 10 percent.

Assume That a Bank Initially Has No Excess Reserves