Second National Bank confronts a reserve requirement of 20 percent and currently holds millions of dollars in excess reserves.If a depositor withdraws $35,000,the excess reserves of the bank will
A)decline by $7,000.
B)decline by $35,000.
C)decline by $28,000.
D)increase by $7,000.

Question

Quizplus · Accepted Answer

With a reserve requirement of 20 percent, the bank is required to hold 20 percent of all deposits as reserves. If a depositor withdraws $35,000, the bank must reduce its reserves by $7,000 (20% of $35,000). As the bank currently holds millions of dollars in excess reserves, the withdrawal of $35,000 will not affect the bank's overall excess reserves significantly, which will be reduced by $28,000 ($35,000 - $7,000). Therefore, the correct answer is C.

Second National Bank Confronts a Reserve Requirement of 20 Percent