If a bank that desires to hold no excess reserves and has just enough reserves to meet the required reserve ratio of 10 percent receives a deposit of $400 it has a
A)$400 increase in excess reserves and no increase in required reserves.
B)$400 increase in required reserves and no increase in excess reserves.
C)$360 increase in excess reserves and a $40 increase in required reserves.
D)$40 increase in excess reserves and a $360 increase in required reserves.

Question

Quizplus · Accepted Answer

The required reserve ratio is 10%, so the bank is required to hold 10% of any deposit as reserves. In this case, 10% of $400 is $40, which the bank must hold as required reserves. The remaining $360 ($400 - $40) can be held as excess reserves. Therefore, the bank will experience a $360 increase in excess reserves (option C) and a $40 increase in required reserves. Option A is incorrect because the bank will have an increase in required reserves, and option B is incorrect because the bank will also have an increase in excess reserves. Option D is incorrect because it is reversed, with $360 in excess reserves and $40 in required reserves.

If a Bank That Desires to Hold No Excess Reserves