Suppose that banks had deposits of $ 400 billiondeposits of $400 billion?, a des

Question

Suppose that banks had deposits of $ 400 billiondeposits of $400 billion?, a desired reserve ratio of 5 percenta desired reserve ratio of 5 percent?, no excess? reserves, and $ 14 billion in currency $14 billion in currency.

What is the amount of commercial bank deposits at the central bank amount of commercial bank deposits at the central bank??

I already know the answer, which is 6 billion, but I'm trying to understand why.

It's 400 multiplied by 5 % and then you subtract 14. I don't understand why we have to subtract the 14 in currency to find the amount of commercial bank deposits at the central bank.

Explanation / Answer

Solution: $400 * 5% - $14 billion = $6 billion

Explanation: Required reserves refers to the reserves on deposit plus vault cash that are required to hold by commercial banks as determined by the central bank. Vault cash is paper currency owned by the commercial bank, thus is substracted in the above calculation

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