69. (Problem 6b) Ryan Cozzens withdraws $400 from his checking account at the lo

Question

69. (Problem 6b) Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet.

If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal? Assume that the bank responds to insufficient reserves by reducing the amount of deposits it holds until its level of reserves satisfies its required reserve ratio. The bank reduces its deposits by calling in some of its loans, forcing borrowers to pay back these loans by taking cash from their checking deposits (at the same bank) to make repayment. A. The bank will have to reduce its deposits by $3,600. B. The bank will have to reduce its deposits by $4,000. C. The bank will not have to reduce its deposits because its reserves will not be insufficient. 69. (Problem 6b) Ryan Cozzens withdraws $400 from his checking account at the local bank and keeps it in his wallet.

If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal? Assume that the bank responds to insufficient reserves by reducing the amount of deposits it holds until its level of reserves satisfies its required reserve ratio. The bank reduces its deposits by calling in some of its loans, forcing borrowers to pay back these loans by taking cash from their checking deposits (at the same bank) to make repayment. A. The bank will have to reduce its deposits by $3,600. B. The bank will have to reduce its deposits by $4,000. C. The bank will not have to reduce its deposits because its reserves will not be insufficient.

Explanation / Answer

Reserve of withdrawn amount can be given as $400*0.1=$40

As reserve is decreased by $400-$40=$360

So bank needs to reduce its deposits by $360/Reserve ratio=$360/0.1=$3600

Hence option A

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