A bank is required to maintain an average daily balance at the Fed of $600 million.In the first 2 days of the maintenance period,it maintains a balance of $450 million,the next three days it maintains a balance of $700 million,the next two days it maintains a balance of $650 million,the next three days it maintains a balance of $450 million,and the next three days it maintains a balance of $650 million.What does its balance at the Fed has to be on the last day of the maintenance period in order to have a zero cumulative reserve deficit?
A)$600 million
B)$400 million
C)$500 million
D)$800 million
E)None of the options is correct

Question

Quizplus · Accepted Answer

To calculate the cumulative reserve deficit, we need to calculate the difference between the actual balance maintained at the Fed and the required average daily balance of $600 million.

The bank maintained a balance of $450 million for the first 2 days, which is $150 million below the requirement. For the next three days, it maintained a balance of $700 million, which is $100 million above the requirement. For the next two days, it maintained a balance of $650 million, which is $50 million above the requirement. For the next three days, it maintained a balance of $450 million, which is $150 million below the requirement. And for the next three days, it maintained a balance of $650 million, which is $50 million above the requirement.

The cumulative reserve deficit is therefore $(150) + 100 + 50 + (150) + 50 = $200 million.

To have a zero cumulative reserve deficit, the bank needs to maintain a balance of $600 million on the last day.

Therefore, the answer is D) $800 million, because the bank needs to maintain a balance of $800 million on the last day to bring the average balance to $600 million.

A Bank Is Required to Maintain an Average Daily Balance