For the following question,assume the following facts: (1)Chase (which is located in the United States)has a 20% reserve requirement imposed by the government.
(2)Bank of Germany has no reserve requirements.
(3)Both banks may invest at an 8% interest rate.
(4)Both banks have fixed costs of $3 per deposit made.
What is the difference between the minimum interest rates each bank can offer and still make a profit if the deposit is $500 for 1 year?

Question

Quizplus · Accepted Answer

For Chase:
Reserve requirement = 20% of $500 = $100
Fixed cost per deposit = $3
Total cost per deposit = Reserve requirement + Fixed cost = $100 + $3 = $103
Amount left to invest = $500 - $100 = $400
Interest earned on $400 at 8% for 1 year = $32
Profit = Interest earned - Total cost per deposit = $32 - $103 = -$71
Chase cannot make a profit even if they offer 8% interest rate.
For Bank of Germany:
Fixed cost per deposit = $3
Amount left to invest = $500
Interest earned on $500 at 8% for 1 year = $40
Total cost per deposit = Fixed cost per deposit = $3
Profit = Interest earned - Total cost per deposit = $40 - $3 = $37
Bank of Germany can make a profit even if they offer a lower interest rate.
The difference between the minimum interest rates each bank can offer and still make a profit is:
Bank of Germany's minimum interest rate - Chase's minimum interest rate = 8% - 0% + 1.6% (to account for Bank of Germany's fixed cost) = 1.6%

For the Following Question,assume the Following Facts: (1)Chase (Which Is