Assume that the required reserve ratio is 20 percent. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the excess reserves at Bank A and Bank B?
A) increase by $10,000 at Bank A, and decrease by $10,000 at Bank B
B) decrease by $10,000 at Bank A, and increase by $10,000 at Bank B
C) decrease by $50,000 at Bank A, and increase by $50,000 at Bank B
D) increase by $50,000 at Bank A, and decrease by $50,000 at Bank B

Question

Quizplus · Accepted Answer

When the $50,000 check is deposited at Bank A, Bank A's reserves increase by $50,000. With a 20% reserve requirement, Bank A must keep $10,000 (20% of $50,000) as required reserves, leaving $40,000 as excess reserves. Bank B, on the other hand, sees its reserves decrease by $50,000, reducing its ability to lend by that amount, effectively decreasing its excess reserves by $10,000, assuming it was holding the $50,000 as excess reserves. Therefore, the excess reserves increase by $10,000 at Bank A and decrease by $10,000 at Bank B.

Assume That the Required Reserve Ratio Is 20 Percent