Assume that the reserve requirement is 25 percent and that the amount of checkable deposits in Federal Bank is $200.If the bank has loaned out $120, then the bank's excess reserves must equal:

Question

Quizplus · Accepted Answer

The reserve requirement is 25 percent, which means that the bank must hold 25% of its checkable deposits as reserves. In this case, the bank's checkable deposits are $200, so the required reserves are:

$200 x 0.25 = $50

If the bank has loaned out $120, its total reserves must still be equal to the required reserves plus the amount of loans:

Total reserves = Required reserves + Loans

Total reserves = $50 + $120 = $170

Therefore, the bank's excess reserves are:

Excess reserves = Total reserves - Required reserves

Excess reserves = $170 - $50 = $120

However, the question is asking for the amount of excess reserves, not total reserves. So, we need to subtract the loans from the excess reserves:

Excess reserves = Total reserves - Loans

Excess reserves = $170 - $120 = $50

Therefore, the bank's excess reserves are $50, which is equal to the initial required reserves before the loans were made. The best choice is C.

Assume That the Reserve Requirement Is 25 Percent and That