Question

The reserve requirement rate is 5%. A bank’s deposits are $200 and it is holding $25 in reserves. Then,

		The required reserves are $10
		The excess reserves are $15
		The money multiplier is 20
		(a), (b) and (c) are correct
		(a) and (b) are correct
		(a) and (c) are correct
		(b) and (c) are correct

Answer 1

Answer- (a), (b) and (c) are correct.

Required reserves are a certain percentage of the deposits of the bank which it is required to keep with itself in the form of reserves. These reserves cannot be used by the bank to extend loans and advances. Required reserves are calculated as-

​​​​​​Required reserves= deposits x required reserve ratio

Given that- deposit= $200, required reserve ratio= 5%

Required reserves= $200 x 5%

Required reserves= $200 x 5/100

Required reserves= $200 x 0.05

Required reserves= $10

Hence, the required reserves of the bank are $10.

Excess reserves are the reserves which are over and above the required reserves. These reserves can be used by the bank to extend loans and advances.

Given that the bank is holding $25 in reserves.

As we calculated above, the required reserves of the bank are $10 whereas the bank is holding $25 in reserves. Hence, the bank is holding reserves which are over and above the required reserves.

Excess reserves= actual reserves - required reserves

Excess reserves= $25 - $10

Excess reserves= $15

Hence, the excess reserves of the bank are $15.

Money multiplier tells us by how many times the money supply will increase as a result a deposit made. Money multiplier is calculated as-

Money multiplier= 1/RR

( Where RR is the required reserve ratio)

Money multiplier= 1/5%

Money multiplier= 1/0.05

Money multiplier= 20

Hence, the money multiplier is 20.

Hence,( a), (b) and( c) are correct.