Question

uestion 44 Suppose that National Bank of Guerneville has ?$35 million in checkable? deposits, Commonwealth Bank has ?$42 million in checkable? deposits, and the required reserve ratio for checkable deposits is? 10%. If National Bank of Guerneville has? $4 million in reserves and Commonwealth has? $5 million in? reserves, how much in excess reserves does each bank? have? ?(Enter your answers rounded to one decimal? place.) Now suppose that a customer of National Bank of Guerneville writes a check for ?$3 million to a real estate broker who deposits the check at Commonwealth. After the check? clears, how much in excess reserves does each bank? have?

Answer 1

We are given that reserve ratio is 10%. Anything above it is excess reserve. So first we see the case of National bank of Guerneville. It has the total checkable deposits as $35 million. 10% of the amount is $3.5 million is the required reserve.So National bank has $4 mn -$ 3.5 mn

=$0.5 million of excess reserve.

Similarly now we look at the case of Commonwealth bank . It has checkable deposits of $42 million.

We need a required reserve of 10% which is $4.2 million and the bank holds reserves of 5million

So excess reserve are= Total reserve- required reserve

= $5mn-$4.2 mn

=$0.8 mn

Now we see that a customer deposit check from national bank of Guerneville to Commonwealth. So in a way the checkable deposits of National bank of Guerneville reduces and the checkable deposits of Commonwealth increases by same amount.

Now the new amount of checkable deposits in national bank of Guerneville is $35mn-$3 mn = $32 million.

So required reserve is 10% of 32 million is $3.2 mn.

Excess reserve is = $4-3.2 mn

=$0.8 mn

Now we see the effect of this on Commonwealth bank

The checkable deposits of Commonwealth games increase by 3Million$. So it means that the amount is $45 mn.

Required reserve is 10% which is $4.5 mn

Excess reserve is $5-4.5 mn

=$0.5 million.

So in the second case there is a decrease in excess reserve in commonwealth bank and increase in national banks of Guerneville.