Scenario 16-1.The monetary policy of Namdian is determined by the Namdian Central Bank. The local currency is the dia. Namdian banks collectively hold 100 million dias of required reserves, 25 million dias of excess reserves, 250 million dias of Namdian Treasury Bonds, and their customers hold 1,000 million dias of deposits. Namdians prefer to use only demand deposits and so the money supply consists of demand deposits.
-Refer to Scenario 16-1. Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve requirement and what is the reserve ratio?
A)2 percent, 8 percent
B)8 percent, 10 percent
C)10 percent, 12.5 percent
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The total deposits held by the banks and their customers is 1,000 million dias. Given that the banks collectively hold 125 million dias of excess reserves, their desired ratio of excess reserves to deposits is 25/1000 = 2.5 percent. Therefore, the required reserve ratio is 10 percent (since the desired ratio is 2.5 percentage points above the required ratio). The total required reserves are therefore 0.10 x 1,000 million dias = 100 million dias. Thus, the reserve requirement is 100 million dias, and the reserve ratio is 100/1,000 = 12.5 percent.