Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. From the point of view of the bank,
A) $160 of this deposit will be required reserves; $840 will be excess reserves.
B) $200 of this deposit will be required reserves; $800 will be excess reserves.
C) $128 of this deposit will be required reserves; $872 will be excess reserves.
D) Half of the deposit will be required reserves, half will be excess reserves.

Question

Quizplus · Accepted Answer

The required reserve ratio set by the Federal Reserve is 20%, which means the bank must hold 20% of the $1000 deposit ($200) as required reserves. The remaining $800 will be excess reserves, which the bank can use to make loans or invest in other assets.

Assume That the Federal Reserve Sets a Required Reserve Ratio