Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is just meeting its desired reserve ratio. Now suppose a decrease in the required reserve ratio lowers the desired reserve ratio to 10 percent. After the fall in the desired reserve ratio but before the bank makes any changes, the bank's excess reserves are

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Quizplus · Accepted Answer

The bank initially has $100 million in reserves, which was meeting the previous reserve requirement. With a new desired reserve ratio of 10%, the required reserves are now $50 million (10% of $500 million). Therefore, the excess reserves are $100 million - $50 million = $50 million.

Suppose That a Bank Begins with $500 Million in Deposits