Quiz 1. A bank faces a required reserve ratio of 5 percent. If the bank has $200

Question

Quiz 1. A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of total deposits and $15 million of total reserves, then how large are the bank's excess reserves? a. $0. b. $5 million. c. $10 million. d. $15 million. 2. If a banking system receives an initial deposit of $20,000 and the reserve requirement is 20 percent, the maximum potential increase in total deposit in the banking system (including the initial deposit) would be a. $20,000 b. $40,000 c. $80,000 d. $100,000 e. $120,000

Explanation / Answer

1. Reserve requirement for banks = 5% of $200,000,000

= (5/100) x 200,000,000

= $10,000,000 = $10 million

Total reserves with bank = $15,000,000 = $15 million

Excess Reserves = Existing reserves - Reserve requirement = $15 million - $10 million = $5 million

Thus, the correct answer is option b. $5 million.

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