Assume that First Bank makes a $450 loan to a student named Kathy. Kathy takes the loan and spends it all at the Augustana College Bookstore. The bookstore in turn deposits Kathy's check in the bookstore account at Second Bank. What are the respective amounts of required reserves and excess reserves that Second Bank initially holds against this deposit? Assume the following: a 10 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash.

Question

Quizplus · Accepted Answer

Second Bank is required to hold 10% of Kathy's $450 deposit as reserves, which equals $45. Therefore, $45 is considered required reserves and the remaining $405 ($450 - $45) is excess reserves. Banks hold excess reserves when they choose to, but this question assumes they do not.

Assume That First Bank Makes a $450 Loan to a Student