Assuming a required reserve ratio of 8%,interest rate on reserves of 0.5%,and interest rate on loans of 4%,what is the effective cost of the reserve requirement on a $1,000 deposit?

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The effective cost of the reserve requirement is calculated by considering the opportunity cost of holding reserves instead of lending them out. With an 8% reserve requirement, $80 must be held in reserves. The bank earns 0.5% interest on these reserves, which is $0.40 ($80 * 0.5%). If the bank could lend out the $80 at 4%, it would earn $3.20 ($80 * 4%). The difference, $2.80, represents the opportunity cost of the reserve requirement on a $1,000 deposit. To find the percentage cost, divide $2.80 by $1,000, resulting in 0.28%.

Assuming a Required Reserve Ratio of 8%,interest Rate on Reserves