Assume that First Bank makes a $400 loan to a student named Jamie. Jamie takes the loan and spends it all at the Alberts College Bookstore. The bookstore in turn deposits Jamie'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 20 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash.

Question

Quizplus · Accepted Answer

The initial deposit of $400 from Jamie will increase Second Bank's reserve account by $400. Second Bank will be required to hold 20% of this deposit as required reserves, which equals $80. The remaining $320 is excess reserves. Therefore, the correct choice is B.

Assume That First Bank Makes a $400 Loan to a Student