The required reserve ratio is 20 percent.All banks have zero excess reserves.A check for $1 million is deposited in Bank A,written on an account from Bank B.What are the new excess reserves at Bank A,and by how much does the money supply change if all banks make loans so that they have zero excess reserves?

Question

Quizplus · Accepted Answer

The required reserve ratio is 20%, which means that Bank A is required to hold 20% of the $1 million deposit as reserves, or $200,000. Therefore, the initial excess reserve at Bank A is $0 because it has no reserves above the required amount.

When Bank A receives the deposit of $1 million, it credits the depositor's account with $1 million, but it must hold $200,000 as reserves against that deposit, leaving Bank A with $800,000 in excess reserves.

Assuming that all banks make loans so that they have zero excess reserves, Bank A will loan out $800,000. Every loan that is made in the banking system creates new deposits, which increases the money supply. Since Bank A has loaned out $800,000, the money supply will increase by the same amount.

The Required Reserve Ratio Is 20 Percent