Question

Third National Bank has reserves of $10,000 and checkable deposits of $100,000. The reserve ratio is 10 percent. Households deposit $15,000 in currency into the bank and that currency is added to reserves. What level of excess reserves does the bank now have?

Answer 1

• Excess reserves are the amount of reserves that are in excess at a bank.

Given that,

Reserves = $10,000, Reserve Ratio = 10% = 0.10, checkable deposits = $100,00 and households deposits = $15,000.

Now to calculate the level of excess reserves we need to use the formula,

Excess reserves = actual reserves - required reserves ---(1)

Now we need to find, new Checkable deposits. It is given by the formula,

New Checkable deposits = checkable deposits + households deposits.

= $100,000 + $15,000

= $115,000//

Next we have to find the required reserves, it can be found by applying the following formula :

Required reserves = required reserve ratio * new Checkable deposits.

= 0.10 * $115,000

= $11,500//

Actual reserves can be calculated as,

Actual reserves = Banks reserves + deposits by households.

= $10,000 + $15,000

= $25,000//

Now, we substitute the values of actual reserves and required reserves in the equation (1) and we get :

Excess reserves = Actual reserves - Required reserves

= $25,000 - $11,500

= $13,500//