A bank receives a demand deposit of $5,000. The bank loans out $3,500 of this deposit and increases its excess reserves by $500. What is the required reserve ratio?

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The required reserve ratio is the portion of the deposit that banks must keep on hand, according to the Federal Reserve. In this scenario, the bank increased its excess reserves by $500, meaning that it kept $500 more than the required reserve ratio. Therefore, the required reserve ratio must be 20% ($500 as a proportion of $2,500: $500/$2,500 = 0.20 or 20%). Any excess reserves beyond 20% will increase the bank's ability to lend or invest.

A Bank Receives a Demand Deposit of $5,000