The following table shows Free Donut Bank's balance sheet. Free Donut Bank has a required reserve ratio of 20 percent and has $75 in excess reserves.

-Refer to the table above.What is the amount of Free Donut Bank's cash equivalents?

Question

The following table shows Free Donut Bank's balance sheet. Free Donut Bank has a required reserve ratio of 20 percent and has $75 in excess reserves.
 
-Refer to the table above.What is the amount of Free Donut Bank's cash equivalents?

Quizplus · Accepted Answer

Cash equivalents include securities that can be easily converted into cash, such as Treasury bills and money market funds. Looking at the balance sheet, we can see that Free Donut Bank has $550 in securities, $125 in reserves at the Federal Reserve Bank, and $75 in excess reserves. The excess reserves do not count towards cash equivalents since they are not readily available for use. Therefore, the amount of cash equivalents is $550 + $125 = $675. However, we need to adjust for the required reserve ratio of 20%, which is calculated as 0.20 x $800 = $160. This means that Free Donut Bank needs to hold $160 in reserves and can lend out the rest. Since they already have $125 in reserves, they only need an additional $35. Therefore, $110 ($675 - $160 - $75) is the amount of Free Donut Bank's cash equivalents.

The Following Table Shows Free Donut Bank's Balance Sheet