Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 20 percent,what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

Question

Quizplus · Accepted Answer

Excess reserves are the amount of reserves a bank holds above the required reserve ratio. The required reserve ratio is 20%, so the required reserves are $2,000,000 * 0.20 = $400,000. The bank's total reserves are $500,000, so its excess reserves are $500,000 - $400,000 = $100,000. The excess reserves can be used to create $100,000 / 0.20 = $500,000 in new loans.

Exhibit 25-1 a Bank's Assets Consist of $500,000 in Total