Answer the question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion;legal reserve ratio = 0.20;excess reserves prior to the currency deposit = $0. Refer to the information.The $40 billion deposit of currency into checking accounts will create excess reserves of:
A) $20 billion.
B) $32 billion.
C) $40 billion.
D) $0.

Question

Quizplus · Accepted Answer

The legal reserve ratio is given as 0.20, which means that banks have to hold 20% of their deposits as reserves. Prior to the currency deposit, excess reserves were zero.

Now, $40 billion is deposited into checking accounts, of which 20% ($8 billion) will be held by banks as required reserves. Therefore, the remaining $32 billion ($40 billion - $8 billion) will be available as excess reserves.

Therefore, the excess reserves created by the deposit of currency are $32 billion, which is option B.

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