The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:

-Refer to the information above to answer this question.Assume that a cash deposit of $20 is made into a chequing account in the banking system.As a result,what will be the amount of excess reserves?

Question

The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:
 
-Refer to the information above to answer this question.Assume that a cash deposit of $20 is made into a chequing account in the banking system.As a result,what will be the amount of excess reserves?

Quizplus · Accepted Answer

The initial reserve requirement is 20% of $400 billion = $80 billion. When a $20 cash deposit is made, the total amount of reserves in the banking system will increase to $101 billion (i.e. $80 billion + $20 deposit + $1 billion excess reserves). Since the deposit adds $20 to reserves but only $16 is needed to meet the reserve requirement (20% of $80 billion), the remaining $4 will be excess reserves. Hence, the amount of excess reserves will be $4 billion.

The Following Is the Balance Sheet of the Whole Banking