The Banks of the Mississippi has excess reserves of $20,000, desired reserves of $80,000 and the desired reserve ratio is 5 percent. What are the total amount of deposits in this bank?

Question

Quizplus · Accepted Answer

The formula to calculate total deposits is:
Total Deposits = Excess Reserves / Desired Reserve Ratio

Given, Excess Reserves = $20,000
Desired Reserve Ratio = 5% or 0.05
So, Total Deposits = $20,000 / 0.05 = $400,000

But, we also know that Desired Reserves = $80,000
So, Actual Deposits = Total Deposits + Desired Reserves
Actual Deposits = $400,000 + $80,000 = $480,000

Therefore, the total amount of deposits in this bank is $1,600,000 (Answer C)  which is not an option in the choices given. The closest option is $1,000,000 (Option B) but it is not the correct answer.

The Banks of the Mississippi Has Excess Reserves of $20,000