A depositor places $5,000 in cash in a commercial bank, and the reserve ratio is 20 percent; the bank sends the $5,000 to the Federal Reserve Bank. As a result, the reserves and excess reserves of the bank have been
Increased by

Question

Quizplus · Accepted Answer

When the depositor places $5,000 in cash in the bank, the reserves of the bank increase by $5,000. However, due to the reserve ratio of 20 percent, the bank must hold 20 percent of the deposit ($1,000) as required reserves and can lend out the other 80 percent ($4,000) as excess reserves. When the bank sends the $5,000 to the Federal Reserve Bank, its reserves decrease by $5,000, but it still holds $1,000 in required reserves and $4,000 in excess reserves, so both its reserves and excess reserves remain unchanged. Therefore, the correct answer is B, with reserves and excess reserves both increasing by $5,000 and $4,000, respectively.

A Depositor Places $5,000 in Cash in a Commercial Bank